The ratio of dividends paid to common stockholders relative to market price per share is known as the dividend yield. This ratio is typically expressed in terms of a percentage.
Calculation
Dividend Yield (%) = (Dividends per Share / Stock Price or Market Price per Share) x 100
Explanation
Profitable companies often have a choice to reinvest this money back into the company; hoping to grow earnings. Alternatively, they can return those profits to shareholders in the form of dividends. Fast growing companies typically pay little or no dividends, while more mature companies may choose to return those profits to shareholders in the form of a dividend.
Dividend payments are extremely important to some shareholders, and of secondary consideration for others. While some investors seek out a regular stream of income from a stock, others invest in the hope of securing capital gains through rising stock prices.
Dividend yield is very important to investors whose primary objective is to obtain a steady source of income from their investments. The dividend yield provides analysts, and investors, with a quick way to compare the merits of alternative opportunities.
Example
Company A's net income for year was $4,283,000. The company's directors declared dividends totaling $1,555,000. The company has approximately 706,766 shares of common stock outstanding. Company A's current market price is $89.26 per share.
Using the above formula, the dividend yield for Company A would be:
= (($1,555,000 / 706,766) / $89.26) x 100 = ($2.20 / $89.26) x 100, or 2.46%
The times preferred dividends earned measures a company's ability to meet its preferred dividend payments to shareholders. This financial ratio only requires two inputs, net income and the company's annual preferred dividends paid, both of which can be found on the company's income statement.
The financial accounting term dividends payable is used to describe the cash owed by a company to its stockholders, based on a distribution that has been formally authorized by the company's board of directors. Dividends payable are categorized as a current liability on the company's balance sheet.
The term convertible preferred stock is used to describe one of several classes of preferred stock that can be issued by a company. To add to the marketability of this investment, convertible preferred stock provides the holder with the right to exchange this investment for shares of common stock.
The term ex-dividend date refers to the day after which a security no longer carries with it the right to a company's recently declared dividend payment. An investor that acquires a security on or after the ex-dividend date is not entitled to the payment of that dividend.
The term liquidating dividend refers to the process of providing shareholders with a partial or full distribution of their capital investment in the company. Liquidating dividends are typically paid when a company is going out of business or has sold a portion of the enterprise.
The term dividend payout ratio refers to a measure of the dividends paid to shareholders relative to the net income generated by the company. The dividend payout ratio is an important profitability metric, and one that's closely watched by investors that rely on the payment of dividends as a source of household income.