### Dividend Yields

The dividend yield (D.Y) is often referred to in common parlance simply as a 'dividend'. Mathematically it can be calculated by the dividend-price ratio i.e. the D.Y of a share is the dividend per share, divided by the price per share.

It can also be summarized as a company's total dividend payments (annual) divided by its market capitalization (Here the underlying assumption is that the amount of shares always remain constant). The D.Y is typically expressed in a percentile value.

### How it Works

Formula

Dividend Yield = Annual Dividend / Current Stock Price

Here as an example we will make the assumption that that you own approximately 1000 shares of a company, let’s call it AB. Each share of the aforementioned company pays \$2 of annualized returns as dividends.

If the stock price as of today is \$10, then as per this formula the dividend yield of the company may easily be calculated as:

\$2 / \$10 = 0.2 = 20%

Here it can clearly be seen that there’s an inverse relationship between total dividend yield vis-à-vis the current stock price.

So if the company's per share value were to increase to \$12, the yield will drop to 16.7%.

While the original investment would still reap greater returns and would surge higher, nevertheless the yield percentile would take a steep drop. And the investment would be worth more but the yield on the investment would fall from 20% to 16.7%.

Dividend yields remain constant unless changed by the company itself

Another thing to note about dividend yields is that they remain constant, I.e. until and unless the company changes its dividend policies you would still be receiving an estimated \$2 per share and that has nothing to do with the rise or fall of the price of the stock in the share markets.

D.Y as a measurement of cash flows

D.Y is by far the simplest measurement of much cash flows are being generated from an investment. This hold especially true where there are no capital gains and D.Y is the only effective measurement of ROI (Return on investment).

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The power of dividend yields to fol~.-cast s'~ ck returns, measured by regression R 2, inrA-eases with the return horizon. We offer a two-part explnnatio~.(1)]-Iieh at~ c} o~ rfe] ation causes the variance of expected returns to grow faster than the return horizon.(2) The growth … Dividend yields, dividend growth, and return predictability in the cross section of stocks
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The power of dividend yields to fol~.-cast s'~ ck returns, measured by regression R 2, inrA-eases with the return horizon. We offer a two-part explnnatio~.(1)]-Iieh at~ c} o~ rfe] ation causes the variance of expected returns to grow faster than the return horizon.(2) The growth … Dividend-yield strategies in the Canadian stock market
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The power of dividend yields to fol~.-cast s'~ ck returns, measured by regression R 2, inrA-eases with the return horizon. We offer a two-part explnnatio~.(1)]-Iieh at~ c} o~ rfe] ation causes the variance of expected returns to grow faster than the return horizon.(2) The growth …

#### What are some other ways of measuring cash flows besides using Dividend Yields ?

Some other ways include Return On Equity (ROE), Earnings Per Share (EPS), Net Profit Margin (NPM). All these measurements are used for calculating cash flows but they all have their own limitations and hence should not be used interchangeably with each other.

#### Why should we use Dividend Yields instead of ROE or NPM ?

Because Dividends are considered as part of shareholders' equity while earnings are considered as part

#### What is a dividend yield?

A dividend yield is the amount of dividends paid per share divided by the price per share.

#### How can you calculate a company's total dividend payments (annual) divided by its market capitalization?

Dividend Yield = AnnualDividend CurrentStockPrice

#### What does it mean to say that there is an inverse relationship between total dividend yield and current stock price?

As the stock price increases, the total dividend yield decreases.