A shareholder is a part owner in a company, and therefore has a certain share in the profits of the company.
Many companies return this profit to their shareholders in the form of a dividend. Usually, the companies that regularly declare dividends, do it multiple times a year. If the dividend is declared before the company’s AGM (Annual General Meeting) it is called anÂ interim dividend, and if it is declared at the AGM of the company, then it’s called final dividend.Â
This needn’t be the case always, and Andhra Bank is a good example of a regular dividend paying company that declares dividends just once a year.
For 2011 and 2012, they paid Rs. 5.50 as dividend, and for 2010, they paid Rs. 5 as dividend.
How to calculate the dividend yield of a stock?
To calculate the dividend yield, you have to simply calculate the percentage of how much money you got from the company in the form of dividends for the price per share.
In the case of Andhra Bank, they closed at Rs. 91.20 yesterday so at 5.50 dividend, the yield comes out to be (5.50/91.20)x100 = 6.03%.
As you can well imagine, the exact dividend yield changes very frequently because the stock price is different every second of the day. And then with a market as volatile as the Indian one, the yield may look quite different in a 12 month time frame.
In the case of Andhra Bank itself, the 52 week high of the share is Rs. 130 so sometime within the last year the dividend yield on this share was 4.2% which is not bad, but isn’t quite as impressive as 6 odd percent.
Then there is the case of splits, bonuses and special dividends. Kilitich Â Drugs announced a special dividend of Rs. 30 sometime last year, and right now the market price of this company is Rs. 22 making the dividend yield ridiculously high. It isn’t likely that you get another dividend this high ever again so looking at the dividend yield is pretty much useless for this company.
How to find high dividend yield stocks?
I created a big list of high dividend yielding shares last year, and that was a very time consuming exercise for me. It took days if I remember correctly, and while it was quite useful, for the time it took, I couldn’t do it again.
I searched for this information again, and this time I got a link from Moneycontrol that has a list of high dividend yield shares neatly arranged by descending order.
I think this is a great place to start if you are looking for high dividend yield shares. I say great starting point because you need to dig deeper once you find names on this list. The company that I mentioned earlier – Kilitich – tops the Moneycontrol list and while the dividend yield may be technically correct, it doesn’t do you a lot of good practically speaking.
How to use high dividend yield stocks for investing?
Although there are many ways to look at dividend yields, I feel it is quite useful in one very specific instance. If you are a risk averse investor who wants to start out in the stock markets, then buying a few very old companies with low debt, low P/E and a decent dividend yield is a good way to get started.
I did this for my wife’s portfolio during the last crisis and bought a few companies that had been around for ages, had low debts, and a reasonable dividend yield.
The results aren’t mind boggling but for the risk that she wanted to take, I think they are pretty satisfactory. If the dividends keep coming in then you are at peace that although there is panic in the market, this company seems to be doing okay, and you don’t panic yourself and sell the shares.
Finally, dividend yields can be a starting point to narrow down your choices, but that alone shouldn’t drive your decision. You need to look at other aspects like the financial strength of the company, debt levels, competition, promoter pledges etc. before making a final decision to buy.
6 thoughts on “What is dividend yield?”
Is it good idea to buy a stock on ex-dividend date. I usually observe in most cases that the stock price falls more than the dividend amount on ex-dividend date
I started my investing journey,some 3 years back, looking for companies paying decent dividend. TIC, Balmer Lawrie etc.. used to be my favorites. But since then i have had change of opinion (Thanks to TED & Valuepickr), on this style of investing, and here are some quick points on why i no longer prefer div. yield based investing:
1. Normally dividend comes from the profit a company makes from it’s operations (Banking in case of Andhra Bank). So while yield is calculated depending upon the market price and the dividend paid by the company in the last year. A good div. yield by itself is no guarantee of future dividend & return for the investor. If the companies operation doesn’t do well in future, then past dividend payment record is of no use for the investor. So, it’s important to have an informed opinion on the future prospects of the company in question.
2. Secondly, it’s quite possible that what you make in dividend can be lost in form of stock price. So, while we might get into a stock expecting a neat 5-6% yield, it’s quite possible that the price doesn’t move at all for years or goes down from our purchase price even after holding for years and that’s because companies core operation isn’t doing so well. In case of Andhra Bank, the price was at 99 in March 2010, at yield of close to 5%. with 10 odd rs gain in dividend in last 2 years, the stock price has lost what we gained from dividend, where the EPS has only moved from 21.56 to 24.03 (not so good growth rate). Hardly the kind of return for which we should be taking the risk of equities. This example may not be a great one with data picked to fit the theory, but i hope, i made the point ?
3. It’s quite possible for a business which has been around for years profitably to be doing badly (losing growth momentum) due to recent developments in the industry/management cadre/changed customer preferences/environment… etc etc… the list is endless. It’s never easy to figure out all this by looking at just dividend yield, so it’s good to not get lured into an investment just because of yield.
4. Ok, those were few quick negative points. For a good investment, i would like to refer you to few points documented by Mr. Basant Maheswari of TheEquityDesk fame:
– Businesses with strong Moats (Entry Barriers) run by able and honest management.
– Businesses that provide a scale of opportunity to grow at 20% or more for longer periods of time.
– The business character should preferably be dull and boring where the leader is taking away market share from its competitors.
– Sector or Industry leaders – Best in class.
– Most of these would be secular growth (non-cyclical) businesses.
– Efficient users of capital (High ROCE and ROE) with very little or no debt.
– Free cash flow generators with low incremental capital expenditure.
– Prospective yield stocks, i.e. the dividend yield might not be too high today but over a period of time the free cash flow should be enough generate sufficient dividend on current market price.
Great points – Raja – I might make a mini post out of your comment! Thank you very much!
Sure Manshu. Glad you liked the points.
I must say Andhra Bank’s dividend yield is quite attractive at 6 %, that too tax free!!. In US, you will find many old & stable companies giving good dividend yields (which are better than bank deposit rates). In India bank deposit rates are much higher, so rarely will dividend yields better bank interest rates.
Yeah, that’s quite true Ankur.