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{Most people who invest in the stock market focus on price appreciation–that is, whether the share price goes up or down. But there is another way to make money from owning shares – through dividends. Shares that pay a dividend are called income shares. The dividend yield gives some insight as to how much income shareholders receive and whether the company pays a dividend at all. When evaluating shares, income investors look at dividend yield as one of their criteria
What is a dividend?
A dividend is a payment made to shareholders that allows them to earn returns on their investment aside from share price appreciation.
Not all shares pay dividends. Yahoo, Google and Apple, for example, have never paid a dividend. Some companies have decided it is more beneficial to investors in the long run to reinvest profits back into the company. Dividends are usually paid twice yearly. They are expressed in per-share amounts
What is dividend yield?
Dividend yield tells an investor how much shareholders receive in cash payout as compared with the share price. It is expressed in terms of a percentage. This number allows shareholders to look at shares and decide which ones will produce significant income. The dividend yield is calculated as the amount of dividend (annualised) divided by the share price. Since dividends on common stocks are not guaranteed, the dividend yield calculation uses historical dividends in the numerator
For example, if IBM pays its shareholders a half yearly dividend of 80p per share, this equates to £1.60 annual dividend. If the current share price for IBM shares is £88, then the dividend yield would be 1.9 %
But always remember that the effective yield of any share you buy is based on your initial investment, not the current market price of the share. In the example above, if you bought the share for £64, the yield on your initial investment is actually 2.5% – plus you would have a capital gain of 37.5% on your investment!
Why is it important?
On its own the dividend yield tells you very little. It’s a raw figure that needs interpretation. Experienced investors use dividend yield in many ways when constructing their portfolio:
As a benchmark – Investors use the dividend yield to compare a stock to the overall stock market or to its industry peers. Significant differences can indicate buying or selling opportunities
As a sign of the stability of a company – ordinarily only profitable companies pay out dividends. Therefore, investors often view companies that have paid out significant dividends for an extended period of time as ‘safer’ investments. Thus, should events occur which may be detrimental to the share price, the allure of the dividend combined with the stability of the company can support the price somewhat. Newer companies are less likely to pay dividends because they don’t have a long record of profits and they are more likely to use their profits to pay for further growth of the company
As an predictor of future share price – Low dividend yield can indicate high demand from investors. High demand drives up the share’s price relative to the dividend. Conversely high dividend can indicate a share with low demand from investors, which leads to a lower share price
As an predictor of future dividend payments - if a company has a low yield compared to others in the same industry, this could mean the company’s stock is over-valued because investors are confident of future growth. Alternatively, it can suggest that the company can’t afford to pay the expected dividends. If a company has a high yield in comparison to others in the same sector, it could suggest imminent dividend cuts
As a predictor of risk – Investments that offer higher levels of returns usually come with higher degrees of risk. Many companies sporting very high dividend yields may be linked to the value of a commodity. If the underlying value of the commodity were to experience a steep decline, even if only for a short period during a half year, the dividend amount for that half year may be reduced significantly or entirely
Summary
Dividend yield indicates the ability to generate dividend income as a percent of the investment. It is calculated as the common dividend per share divided by the market price per share
It’s a particularly important valuation measure for investors seeking regular income. As we get older and nearer, or in, retirement, we tend to gravitate more towards income shares. Therefore we like to see a higher dividend yield. Typically higher dividend yields are associated with more stable and mature companies. In the absence of any capital gains, the dividend yield is the return on investment for a share
When it comes to investing, nothing will pay off more than educating yourself. Make sure you do the necessary research and analysis before making any investment decisions}
Unquote:-
Is dividend payment very important to you?
i think to most retail investors yes.
Especially Old man like me.
For some people, they are looking for 5 to 10 to 30 baggers, then it's a different perspective of investing.