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Dividend Yield

Firms do not always distribute all (or any) of the profit that they make amongst their shareholders. This means that even if the earnings per share are a good sum, it doesn’t mean that the shareholders actually earned this amount for each of their shares. Similarly there are no guarantees that an investor will make the amount of money indicated by the earnings ratio calculation. Dividend yield is different to earnings per share and earnings ratio because it takes dividends (the profit that the business has given to shareholders) into account. Dividend yield compares the market price of the share against the dividend paid out by the business.

Dividend Yield             Ordinary Share Dividend
                           =       ____________________        x 100%

                                    Ordinary Share Market Price

For example if the firm’s share market price is £10 (1000p) and they paid out £0.25 (25p) per share the dividend yield would be calculated as follows:

Dividend Yield             25
                           =       ____    x 100%  =  0.25%

 

                                    1000

In our example shareholders received 0.25% of the ordinary share market price back as dividends.

ollar from the shares you buy.

The earnings ratio will change as and when the market price for the firm’s shares changes. The number of times that the firm’s share market price changes (throughout the year) will depend on the firm, economic conditions and the industry that the firm is based in.

 

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