Dividend yield

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    The dividend yield is a measurement that shows how much a company pays out in relation to its share price. It can be calculated with the following formula:

     

    The following example shows why it is important to establish this relationship:

    If company A’s annual dividend is $2 and the value of its stock is $20, the dividend yield is 0.1 or 10%. Company B also pays a $2 dividend but the value of its stock is $40 — this means Company B’s dividend yield is only 0.05 or 5%.

    This shows that, based on the dividends in relation to the share price, company A may be more interesting to investors than company B, because investors will get more for the amount they invest.