The amount distributed among the shareholders out of the profits earned by the company is known as Dividend.
It is not mandatory for the companies to give dividend to its shareholders. If a company is consistently giving dividends, it is not necessary that this company will continue to give dividend in future.
The decision of giving dividend or not is taken by the Board of Directors of the company.
Usually small companies rarely give dividend because they believe in retaining profits so as to utilize that amount for the growth of the organization.
Basically, every share has its face value and market value. The current price of the share in the stock market is known as the market value, which means the price at which you purchase the shares from the stock is the market value.
The market value of the share keeps on changing based on its supply and demand.
Every company also have a nominal value which is known as Face value. When company issues its shares, it decides the face value of its shares. The face value of the share does not change with the change in supply and demand.
Face value changes only in some special events such as stock split and consolidation.
The dividend issued by the company is given based on the face value of the shares.
For example, there is a company called XYZ Ltd.
Market price per share is Rs. 1000
Face value per share is Rs. 10
And if XYZ Ltd. Declares 200% Dividend, it implies that XYZ Ltd will give 200% dividend on its face value i.e., Rs. 20 per share
The dividend yield is the financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
For example, there are two companies namely ABC Ltd. and XYZ Ltd.
Both the companies have given a dividend of Rs. 20 per share. Now, it is difficult to say here that which company has given more dividend per market value of the share.
So, to find this Dividend Yield is used.
If the price of one share of ABC is Rs.1000 and that of XYZ is Rs. 2000. So, now after calculating dividend yield it is easy to compare the dividend of both the companies.
The formula to calculate Dividend Yield is –
Dividend per share/ Market price per share
Now, if we calculate dividend yield of company ABC and XYZ using this formula, we get 2% for company ABC and 1% for company XYZ
The 2% dividend yield of company ABC denotes that dividend of Rs. 2 would be given on every Rs. 100 market value of the share. Similarly, in case of XYZ, on every Rs. 100 of market value, the shareholders will get Rs. 1 as dividend.
So, through this we get to know that the shareholders of ABC company are getting more dividend as compared to XYZ company.
Sometimes it happens that due to fall in price of the share, the dividend yield increases.
So, while evaluating the dividend yield, it is also important to know the reason behind the increase in the dividend yield that it is increased either because of the higher dividend paid by the company or due to decrease in the share price.
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