Dividend is distribution of portion of company earnings or profits to its shareholders. Dividends are normally paid in cash, but can also be paid in shares or through property ownership.
While investing in a company, it is important to study the steady growth of earnings and dividends paid out to its shareholders.
Dividend Yield is the dividend received relative to the share price. Normally dividends are paid on the face value of shares of a company. The formula for dividend yield is:
Annual dividends per share / Price Per Share
Therefore, when one measures the return on capital through dividend yield, it is important to note the real return or dividend yield.
For example when a company announces dividend of 40% and the price of the share is Rs 150. The dividend yield is (4/150*10)*100= 26.67%
Hence the dividend yield for the investor is 26.67% and not 40%, since he has not purchased the share at face value of Rs 10.