What is dividend yield : Sometimes company shares a part of its profit to its shareholder, it is called dividend. Till this moment shareholders do not have to pay tax till 10 lakh rupees dividend. It means dividend is a tax free income of shareholders. It is not compulsory for any company to give dividend to its shareholder. If any company gives dividend regularly then it have no guarantee to give dividend in future regularly. The decision of giving dividend or not is fully depended on the board of directors of the company. Small cap companies are rarely give dividend because most of the time they use it in growth and expansion.
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Basically every stock has two main value.
- Market Value.
- Face Value.
The current price of any stock in stock market is called the market value of the stock. It means in that price you buy or sell a stock is called the market value of the stock. Market value of any stock fluctuates depend on the supply and demand of the stock. And every stock has a nominal value and it is called face value of the stock. Face value does not change on the basis of supply and demand like market value.
Face value only changes in special occasion such as stock spilit and consolidation. There is no relation between face value and market value. Face value is used in accounting and dividend. Dividend is given on face value. For dividend example :imagine X company’s one share price is 1000 rupees and face value is 10 rupees. And the company declares 200% dividend. So dividend
= 200% of its face value.
= 200% of 10 rupees.
= (200/100)*10 ||
= 20 rupees.
So in this case shareholders will get 20 rupees dividend per share. Now discuss about dividend yield.
What is dividend yield?
Dividend yield helps to understand how much more the dividend of the company. Dividend yield is used to compare between the dividend stocks. For an dividend example: imagine P and Q company declares 20 rupees dividend per share. Here the problem is you can not understand that which company gives more dividend per share. So to solve the problem dividend yield is used. If one share price of P company is 1000 rupees and one share price of Q company is 2000 rupees then calculate the dividend yield you can easily compare the dividend of two stocks. So the formula of dividend yield
= {(dividend/share)/(market price/share)}%
So the dividend yield of P company
= (20/1000)*100 (as dividend per share of P stock is 20 rupees and market price per share is 1000 rupees.)
= 2%
And the dividend yield of Q company
= (20/2000)*100 (as dividend per share of P stock is 20 rupees and market price per share is 2000 rupees.)
= 1%
Therefore, 2% dividend yield of P company indicates that P company gives 2 rupees dividend per each 100 rupees share. Similiarly 1% dividend yield of Q company indicates that Q company gives 1 rupees dividend per each 100 rupees share to its shareholders. It is understood to see that in spite of being same market price of share company P gives more dividend than company Q.
Sometimes, dividend yield looks more because of the downfall of share price. For an example, the above mentioned P company’s each share price is 1000 rupees and dividend id 20 rupees/share and dividend yield is 2%. Imagine after one year the share price of P company will 500 rupees for any reason and the company will declare 20 rupees dividend per share then the dividend yield of P company will be 4%. In this case company gives same dividend but dividend yield looks double because of decreasing the share price.
There are many companies which never give dividend to its shareholders. For example,the company of world’s successful investor Mr. Warren Buffet,Berkshire Hathaway does not pay dividend to its shareholders. Because Mr. Buffet thinks if company’s profit is reinvested in company’s existing business like business expand,new products or service launch or aquire good companies then it will be profitable for the company. As a result the company may place first position in competition and increase market price for supply and demand. In this way shareholders may be profitable with the help of capital appreciation.
Capital appreciation means the parallel growing of share price and investment value. Think you invested 100 rupees in any stock 2 years ago and today the share price of the stock is 160 rupees then the difference of 60 rupees is the capital appreciation of the stock. Mr. Warren Buffet either reinvest its profit or aquire good companies.
Mr.Buffet said that in this way they utilized the profit of Berkshire Hathaway as a result the market value and the face value grew well and shareholders became profitable by capital appreciation. If they gave the profit as dividend then shareholders were not profitable like that. As a investor Mr. Buffet invests in some quality companies that gave regular dividend to its shareholders.
If you have any query related to dividend per share and dividend yield please comment below so that the topic can be covered. Best wishes to invest. If you like the post please share the article so that other can know about it and leave a comment.
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