Investment Formula Description
Dividend Yield ( DY ) is a financial ratio that shows how much a corporation pays out in dividends per share in a financial period over the price per share of the corporation.
Normally, the financial period used in dividend yield ( DY ) is one year.This investment formula uses to measure percentage of dividends distributed each year by the corporation and it is a good indicator to identify high dividend corporations. Corporations with high dividend yield are high dividend corporations. Naturally, high dividend corporations have higher resistant on share price drop during market downturn. Although this is an mutual understanding by public, but it does not mean that high dividend corporations are always better corporations because there are other corporations that prefer to pay out the investment return to investors thru capital gain.Hence, for corporations that focus on company growth and capital return, this kind of corporations seldom distributes dividends and retains their profit for corporation expansion and development.To conclude, Dividend yield is a way to measure how much cash flow the investors are getting for each dollar invested in a stock investment. It basically helps you to understand a company dividend's strategy. For investors that would like to have steady cash flow from stock investment, they will use Dividend Yield as one of the basic indicator to identify high dividend corporations.Another thing worth to note is whenever a corporation declares dividend, the price per share for that corporation will reduce to reflect the dividend pay out on the Ex-Date.
Dividend Yield ( DY ) = Dividend per share / Price per Share X 100
Investment Formula Example
If Corporation A distributes $0.1 dividend per share and price per share for Corporation A is $2.00, the Dividend Yield ( DY ) will be as following.
Dividend Yield ( DY ) = Dividend per share / Price per Share X 100 = 0.1 / 2 X 100 = 5 %
In this case, it shows that the investor will get 5% of dividend of the amount invested.
If the investor invests $1000 in Corporation A, the investor will receive total dividend as following.
Total Dividend = Total Investment Amount X Dividend Yield (DY) = $1000 X 5% = $50
The investor that invest $1000 in Corporation A will receive $50 as dividend from his stock investment.
On Ex-Date, the price per share for corporation A will reduce as following.
Price per Share after dividend pay out = Price per share before dividend Pay out - Dividend per Share = $2.00 - $0.10 = $1.90
The Price per share after Ex-date is $1.90 to reflect the dividend pay out.