10.2 Analysis of Published Accounts – Investment Ratios
Dividend Yield: Calculation & Interpretation
📊 Dividend Yield tells investors how much cash flow they can expect from a share relative to its price. Think of it as the interest rate you earn on a bank deposit that is paid in cash, but instead of a bank, it comes from a company.
What is Dividend Yield?
It is the ratio of the annual dividend per share to the current market price per share, expressed as a percentage.
Formula (in LaTeX):
\$\text{Dividend Yield} = \frac{\text{Annual Dividend per Share}}{\text{Current Market Price per Share}} \times 100\%\$
Step‑by‑Step Calculation
- Find the annual dividend per share (e.g., $2.00).
- Find the current market price per share (e.g., $40.00).
- Divide dividend by price: \$2.00 ÷ \$40.00 = 0.05.
- Multiply by 100 to get a percentage: 0.05 × 100% = 5%.
Example: Company X pays \$3 per share and its shares trade at \$60. Dividend Yield = (3 ÷ 60) × 100% = 5%.
Interpretation & What It Tells You
- 📈 High Yield (e.g., > 6%) may mean the company is returning a lot of cash to shareholders, but it could also signal that the share price has fallen sharply, possibly due to company troubles.
- 💡 Low Yield (e.g., < 3%) often indicates the company is reinvesting profits into growth rather than paying dividends.
- ⚖️ Compare the yield with the risk profile and industry average to gauge attractiveness.
Exam Tips
- 📝 State the formula clearly and label each variable.
- 📚 Show the calculation step by step using the figures given in the question.
- 🔍 Explain what a high or low yield indicates in terms of company performance and investor expectations.
- 💬 Use simple analogies (e.g., “dividend yield is like the interest rate on a savings account”) to demonstrate understanding.
- ⏱️ Time your answer – allocate a few minutes for calculation, a few for interpretation.
| Company | Annual Dividend per Share ($) | Current Market Price per Share ($) | Dividend Yield (%) |
|---|
| Company A | 2.00 | 40.00 | 5.0 |
| Company B | 3.50 | 70.00 | 5.0 |