Companies earning profits have the option of keeping the profits as retained earnings for future use or paying dividends to their investors or going for a mix of both.
Many investors look for high dividend-paying stocks as dividends can act as a source of regular income. One important concept used to analyze the dividends paid by companies in the ‘Dividend Yield’.
Dividend Yield measures the dividend earned per unit as a percent of the price of the stock.
It is computed as –
Dividend yield = (Dividend per unit / current market price per unit) x 100
For example:
Company X has a share price of Rs. 50 and announces a dividend of Rs. 5. In this case, the dividend yield of the company will be 5/50 x 100 = 10%.
While analyzing and comparing possible investment alternatives, many investors compare the dividend yield of a company with the average of the industry to which the company belongs.
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