What is dividend yield?

by Manshu on May 2, 2013

in Investments

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 an interim dividend, and if it is declared at the AGM of the company, then it’s called final dividend. 

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  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.

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