FFB-Post 24
Dividend Yield is a crucial metric for evaluating stocks, especially if you’re investing with a focus on earning consistent dividends. The basic idea is to invest in solid businesses that are not only profitable but also consistently share their profits with shareholders in the form of dividends.
How to Calculate Dividend Yield:
Let’s break it down with an example. Suppose you purchase shares of XYZ company at ₹100 per share, and XYZ pays a dividend of ₹10 per share annually. The Dividend Yield would be calculated as:
Dividend Yield = (Expected Dividend per Share / Share Price) x 100
In this case, that’s (₹10 ÷ ₹100) x 100 = 10%.
This means that for every ₹100 you invest, you’re earning ₹10 annually in dividends—a 10% return on your investment just from dividends alone.
Why is Dividend Yield Important?
Dividend Yield helps you assess the return on the money you’re investing. A higher yield means better returns, but it’s essential to balance yield with the stability of the company.
Here are a few things to keep in mind:
- Consistency: Look for companies that have paid consistent dividends for at least 10 years. This history of stable payments is a good indicator of a reliable dividend-paying stock.
- Compare with Risk-Free Rate: Always compare the Dividend Yield with the risk-free rate (the higher of current bond yields or bank deposit rates). A good rule of thumb is to target a Dividend Yield at least 2% higher than the risk-free rate to justify the risk you’re taking by investing in the stock market instead of a safer option.
Summary:
Dividend Yield gives you a clear picture of the returns you can expect from a dividend-paying stock. By focusing on companies with consistent and higher-than-risk-free yields, you can build a portfolio that provides reliable income.
Stay tuned for the next post, where I’ll dive into the Growth Formula!
For Post 25 – Click Here -> Graham’s Secret Growth Formula