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SHAREHOLDER RATIOS
DIVIDEND YIELD

Introduction

Firms do not always distribute all of the profit that they make to shareholders. This means that even if the earnings per share seem to be a reasonable amount, it doesn't’mean that the shareholders have made a good return on their investment. Instead you need to calculate the dividend yield if you would like an indication of how well the return on shares compares to the price of a share.

How Does the Dividend Yield Differ From Earnings Per Share/Earnings Ratio?

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.

Calculating Dividend Yield

To calculate the dividend yield you will need to find out the value of the ordinary share dividend and the ordinary share market price. Once you have these figures divide the ordinary share dividend by the ordinary and multiply the answer by 100%.

 

Dividend Yield             Ordinary Share Dividend
                           =       ____________________        x 100%

                                    Ordinary Share Market Price

 

Example Calculation

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.

Conclusion

The dividend yield will change as and when the ordinary share market price changes and when firms issue a dividend. A firm’s share market price depends on the financial strength of the firm, economic conditions and the industry that the firm is based in.

 

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