How to Calculate Dividend Yield and Dividend Payout Ratio with Examples
Understanding the difference between dividend yield and dividend payout is essential in financial management, especially for students preparing for board exams and competitive tests. These ratios help investors and learners analyze company dividend policies, make informed investment decisions, and answer exam questions confidently.
| Basis | Dividend Yield | Dividend Payout |
|---|---|---|
| Definition | Shows dividend as a percentage of market price per share | Shows dividend as a percentage of earnings per share (EPS) |
| Formula | Dividend Yield = (Dividend per Share / Market Price per Share) × 100 | Dividend Payout Ratio = (Dividend per Share / Earnings per Share) × 100 |
| Focus | Return earned by investor on current market value | Portion of profit distributed among shareholders |
| Significance | Helps compare prospective returns among stocks | Indicates reinvestment vs. distribution policy of company |
| Perspective | Investor-centric | Company-centric |
Dividend Yield Explained
Dividend yield is the financial ratio that shows how much a company pays out in dividends each year relative to its market price per share. It helps investors quickly compare the potential returns from different stocks, especially those focused on earning regular income.
Dividend Yield Formula and Example
Dividend Yield = (Dividend per Share / Market Price per Share) × 100
For example, if XYZ Ltd. pays a dividend of ₹20 per share and its market price is ₹400, then:
Dividend Yield = (20 / 400) × 100 = 5%
This means for every ₹100 invested, the investor earns ₹5 as dividend income annually. Fluctuations in market price will affect this ratio.
Dividend Payout Ratio Explained
The dividend payout ratio reveals what portion of a company’s net earnings are distributed as dividends to shareholders. It helps assess how much profit is retained in the business and how much is returned to investors.
Dividend Payout Formula and Example
Dividend Payout Ratio = (Dividend per Share / Earnings per Share) × 100
Suppose ABC Ltd. has an earnings per share (EPS) of ₹50 and pays a dividend of ₹15 per share:
Dividend Payout Ratio = (15 / 50) × 100 = 30%
This reflects that 30% of the company’s net profit is shared as dividends, while the remaining 70% is retained for growth or other purposes.
Key Differences Between Dividend Yield and Dividend Payout
While both ratios use dividend per share, dividend yield relates the dividend to the share’s current market price, focusing on investor returns. In contrast, the dividend payout ratio relates dividends to the company’s actual profits, emphasizing profit distribution policy. Understanding these fundamental differences helps answer MCQs and write clear exam answers.
| Criteria | Dividend Yield | Dividend Payout |
|---|---|---|
| Relative To | Market price per share | Earnings per share (EPS) |
| Relevance For | Investors evaluating income from investment | Analysts evaluating company’s profit distribution |
| Change Factors | Fluctuates with market price | Changes with company policy and profit |
| Exam Use | Used in investment decision questions | Used in questions about profit allocation |
Practical Application of Dividend Yield and Dividend Payout
Investors use dividend yield to compare income potential from various stocks, especially when aiming for passive income. The dividend payout ratio guides analysts and examiners in judging whether a company is prioritizing dividends or retaining profits for growth. Mature companies like public utilities often have high dividend payout ratios, while fast-growing tech firms tend to have low payouts and reinvest more back into the business.
How These Ratios Help Students and Investors
Grasping the difference between these ratios enhances financial statement analysis and aids in exam preparation. Whether it's for Ratio Analysis, questions on Profitability Ratios, or topics like Financial Management, these ratios are central to both board exams and Olympiads. At Vedantu, we simplify such important Commerce concepts for exam excellence and better real-world understanding.
Summary
In summary, understanding the difference between dividend yield and dividend payout is crucial for financial management. Dividend yield links dividend income to current market price, assisting investors, while dividend payout shows the portion of profits shared as dividends, indicating company policy. Mastery of these concepts helps in exam success and smart investment decisions.
FAQs on Difference Between Dividend Yield and Dividend Payout
1. What is the difference between dividend yield and dividend payout?
Dividend yield and dividend payout ratio are both important financial ratios reflecting a company's dividend policy, but they measure different aspects. Dividend yield shows the annual dividend per share relative to the share's market price, indicating the return on investment for shareholders. The dividend payout ratio, however, focuses on the proportion of a company's earnings paid out as dividends. They use different denominators: market price for yield and earnings for payout.
2. How do you calculate dividend yield and dividend payout ratio?
Calculating these ratios is straightforward. Dividend yield is calculated as (Annual dividend per share / Market price per share) * 100. The dividend payout ratio is calculated as (Dividends paid / Net income) * 100. Both are expressed as percentages. Understanding these formulas is crucial for analysing financial statements and investment decisions.
3. Can dividend yield and payout ratio be negative?
No, a dividend yield cannot be negative, as both the dividend and market price are usually positive values. However, a dividend payout ratio can theoretically be negative if a company has a net loss and still distributes dividends from retained earnings, though this is uncommon. It is important to understand the context of financial statement analysis.
4. Why is dividend yield important for investors?
The dividend yield is a key metric for investors seeking income from their investments. A higher dividend yield generally suggests a higher return relative to the share price. It helps investors compare the income potential of different stocks and assess the return on investment from the shares they own. Note this should be assessed alongside share price growth.
5. What does a 20% dividend payout mean?
A 20% dividend payout ratio means that a company is distributing 20% of its net income as dividends to shareholders. The remaining 80% is retained for reinvestment in the business, research and development, or debt reduction. This ratio highlights a company's dividend policy and approach to growth vs. returns to shareholders.
6. Are higher dividend yields always better?
Not necessarily. While a higher dividend yield might seem attractive, it's essential to consider the underlying reasons. A high yield could indicate financial distress, a low share price, or a temporary dividend increase. It’s crucial to evaluate the company’s financial health, growth prospects, and overall sustainability of its dividend policy before jumping to conclusions.
7. How to calculate dividend payout from dividend yield?
You cannot directly calculate the dividend payout ratio from the dividend yield alone. You need additional information, specifically the company's net income or earnings per share. The dividend yield focuses on the market price of the share, while the payout ratio is based on earnings.
8. What is a dividend payout?
The dividend payout ratio is the percentage of a company's earnings paid out as dividends to its shareholders. It shows how much of the company's profits are distributed, contrasting the amount retained for reinvestment or debt repayment. Understanding the dividend payout ratio is crucial for evaluating a company's financial health and long-term strategy.
9. What do you mean by dividend yield?
Dividend yield is the annual dividend per share relative to the share's market price. Expressed as a percentage, it represents the return an investor receives from dividends relative to the amount invested in purchasing the share. It's a crucial metric for investors focused on income generation through share ownership. A high dividend yield may indicate a higher return on investment, however it is essential to assess underlying reasons for it.
10. How do changes in market price affect dividend yield?
Changes in the market price directly impact dividend yield. If the market price increases, the yield decreases (assuming the dividend remains constant), and vice versa. This is because the yield is calculated based on the ratio of dividend to market price; hence, price fluctuations influence yield significantly. Investors need to consider this dynamic interaction when assessing investment opportunities.
11. Can two companies have the same payout ratio but different yields?
Yes, absolutely. Two companies can have the same dividend payout ratio but different dividend yields. This is because the payout ratio looks at the proportion of earnings paid out, while the dividend yield considers the market price of the share. Differences in market valuation (share price) will lead to variations in yield despite the same payout ratio.
