Dividend yield shows how much cash a company pays you every year compared with the price of its share. It is popular with investors who want regular income from stocks. In this guide you will learn the dividend yield formula, how to use the payout ratio, why a very high yield can be a trap, and a worked example.
Educational content only. This is not investment advice. All company figures below are hypothetical.
Key Takeaways
- Dividend yield = Annual dividend per share ÷ Share price × 100.
- The yield rises when the price falls, even if the dividend stays the same.
- Check the payout ratio to see if the dividend is sustainable.
- A very high yield can signal trouble. Check EPS and cash flow.
What Is Dividend Yield?
A dividend is a part of profit that a company shares with its shareholders in cash. Dividend yield turns that payment into a percentage of the share price, so you can compare it with a bank deposit or another stock.
Dividend Yield Formula
Dividend Yield = Annual Dividend Per Share ÷ Current Share Price × 100
Worked Example
| Item | Value |
|---|---|
| Annual dividend per share | ₹6 |
| Share price | ₹200 |
| Dividend yield | 6 ÷ 200 × 100 = 3% |
| If price falls to ₹150 | 6 ÷ 150 × 100 = 4% |
Notice that the yield went from 3% to 4% only because the price dropped. The company did not pay more. This is why a rising yield is not always good news.
Payout Ratio: Is the Dividend Safe?
Payout Ratio = Dividend Per Share ÷ EPS × 100
If EPS is ₹15 and the dividend is ₹6, the payout ratio is 6 ÷ 15 × 100 = 40%. The company keeps 60% of its profit to grow the business. A payout above 100% means it pays more than it earns, which cannot last.
What Is a Good Dividend Yield?
| Yield | General reading |
|---|---|
| 0% to 1% | Low; usually growth companies that reinvest |
| 1% to 4% | Moderate and often sustainable |
| Above 6% | Check carefully; price may have crashed or the payout may be too high |
Yield Is Not the Whole Return
Total return = price gain + dividend. Buy at ₹200, the price rises ₹10 and you receive ₹6 dividend: total return = (10 + 6) ÷ 200 × 100 = 8%. A stock with a small yield can still give a better total return if its price grows faster.
How to Use It Step by Step
- Find the dividend per share over the last 12 months.
- Divide by the current price to get the yield.
- Check the payout ratio and whether the dividend has been steady for 5 to 10 years.
- Check debt and cash flow.
- Compare with peers and with bank deposit rates.
Pros and Cons
| Pros | Cons |
|---|---|
| Regular cash income | Dividends can be cut at any time |
| Signals a mature, profitable business | A high yield may come from a falling price |
| Easy to compare | Dividends are taxable |
FAQs
Is a high dividend yield good?
Not always. Check the payout ratio and profit trend. A very high yield may warn of a falling price or a dividend cut.
What is a good payout ratio?
Roughly 30% to 60% suits many companies. Above 100% is not sustainable.
Do all companies pay dividends?
No. Many growth companies keep profits to expand.
Does the share price fall after a dividend?
Usually the price adjusts on the ex-dividend date by about the dividend amount, other factors aside.
Is dividend income taxable in India?
Yes, dividends are taxed in the investor’s hands as per their income slab. Check current rules on the official income tax website or with a tax professional.
Conclusion
Dividend yield shows the income side of a stock, but it must be read with payout ratio, profit trend and debt. Read our fundamental analysis of stocks guide to see how it fits the full picture. For daily institutional flow figures, see the FII and DII data home page.
Disclaimer: Educational only, not investment advice or tax advice. Figures are hypothetical. Verify data from official filings. Sources: NSE, BSE, Zerodha Varsity.
