What Is Dividend Yield? Meaning, Formula & Investor Insights

The dividend yield shows how much return an investor earns from dividends compared to the share price. It helps investors understand what they earn just from dividends, not including share price changes.

For example, Meera bought 100 shares of Sunshine Ltd at ₹200 each, spending a total of ₹20,000. At the end of the year, the company paid a ₹10 dividend per share. So, Meera received a total of ₹1,000 in dividends.

We can calculate the dividend yield like this:
Dividend Yield = (₹10 ÷ ₹200) × 100 = 5%

This means Meera earns a 5% return every year from dividends alone on her ₹20,000 investment.

What Does Dividend Yield Mean in the Share Market?

Dividend yield tells you how much income you can earn from a share through dividends. It helps income-seeking investors understand the potential yearly return on their investment. A high or low dividend yield can tell you different things about a company.

Example to Understand Dividend Yield

Let us say you buy one share for ₹500. The company pays a dividend of ₹ 25 each year. Then the dividend yield is:

Dividend Yield = (₹25 ÷ ₹500) × 100 = 5%

This means you earn a 5% return every year from dividends alone.

The dividend yield helps you compare how much return different companies give through dividends based on their share prices. Here's how three companies perform:
 

Read More - Dividend Yield Calculator

Higher dividend yields often mean higher returns but may also carry more risk, while lower yields can suggest more stable, growth-focused companies.

What a High Dividend Yield Tells You?

A company with a high dividend yield (such as 8% or more):

• Pays a large part of its earnings to shareholders.
   
• Attracts investors who want regular income.
   
• May have fewer plans for expansion.
   
• It could be showing loyalty to long-term shareholders.

Example: ONGC and Coal India offer high dividend yields. This is common in sectors like oil and gas or utilities, where growth is steady but slow.

What a Low Dividend Yield Tells You

A company with a low dividend yield (such as 1% or 2%):

• Keeps more of its profits to grow the business.
   
• Focuses on future development rather than current payouts.
   
• Might not give high income now, but may increase in value over time.
   
• Often appeals to growth-focused investors.

Example: Infosys and HDFC Bank have lower yields. This is common in tech or private banking, where companies reinvest to expand quickly.

How Do You Calculate Dividend Yield?

You can use a simple formula to find out how much return you earn from a share through dividends. This return is shown as a percentage of the current share price.

Formula:
Dividend Yield (%) = (Annual Dividend per Share ÷ Current Market Price per Share) × 100

See example below:
XYZ Company pays ₹5 every year as a dividend per share. If one share costs ₹100 now, then:

Dividend Yield = (₹5 ÷ ₹100) × 100 = 5%

This means you earn a 5% return from dividends each year.
If you own 100 shares, you will get ₹500 in total (₹5 × 100).

Factors That Affect Dividend Yield in the Share Market

Many things can change a company's dividend yield. Some of the main factors include the share price, the industry type, how much the company is growing, and how strong its business is.
 

Let’s say a company pays ₹10 dividend per share:

• If the share price is ₹200, the yield = (10 ÷ 200) × 100 = 5%
   
• If the share price rises to ₹300 and dividend stays ₹10, yield = (10 ÷ 300) × 100 = 3.3%

This shows that a rising share price lowers the dividend yield unless the company increases the dividend too.

Benefits of Knowing Dividend Yield

Knowing the dividend yield helps you understand how much income you can earn from your shares. It also guides you in choosing the right company to invest in.
 

Also Read -  How to Calculate Dividends
 

By checking dividend yields, you can plan your income better, compare your options wisely, and understand the company’s approach to using its profits.

Disadvantages of Dividend Yield

While dividend yield helps investors understand potential income, it does have some drawbacks. It does not always give the full picture of an investment.
 

So, while dividend yield is helpful, you should not rely on it alone. Always look at the full picture, including share price movement and the company’s plans.

What Is the Dividend Payout Ratio?

Apart from dividend yield, another key metric is the dividend payout ratio. It tells us how much of a company’s profit is given to shareholders as dividends. This ratio helps investors see whether the company shares its earnings or keeps them to grow the business. The result is shown as a percentage.

The payout ratio links closely with dividend yield. If a company pays more of its profit as dividends, the dividend yield is likely to be higher.

Example

Suppose a company earns ₹1,000 in profit and gives ₹400 as dividends. To find the dividend payout ratio:

(₹400 ÷ ₹1,000) × 100 = 40%

This means the company gives 40% of its profit to shareholders and keeps the rest.

Why Is the Dividend Payout Ratio Important?
 

• It shows how much a company shares with investors.
   
• A high payout ratio (like 70%) means the company gives most of its earnings and keeps less for itself.
   
• A low payout ratio (like 30%) means the company keeps more money to grow and invest.
   
• It helps investors decide whether a company is income-focused or growth-focused.

Conclusion

Dividend yield shows how much income you can earn from a share through dividends. It helps you understand the return on your investment. You can use it to compare different shares and choose the ones that match your income or growth goals. 

FAQ’s
 

1. Can two companies have the same yield but different dividends?
Yes. One company may pay higher dividends, but if its share price is also high, its yield can match a lower-paying company.

2. Does a high dividend yield always mean better returns?
No. A high yield may mean risk. The company might struggle or stop paying dividends later, so always check its health too.

3. Can a dividend yield change every year?
Yes. If the share price or dividend amount changes, the dividend yield also changes. It’s not fixed.

4. Do new companies usually have high dividend yields?
No. New or fast-growing companies often keep profits to grow and pay low or no dividends.

5. Can I lose money even with a good dividend yield?
Yes. If the share price falls a lot, your dividend income won’t cover the total loss.