Dividend Yield
This measurement tells you what percentage return a company pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent. Since Younger companies tend to have very low to no dividends, they are much cheaper than successful older companies. Basically what a buyer is really paying for when they purchase a stock is dividends until they decide to sell it.
You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price.
Dividend Yield = annual dividend per share / stock's price per share
For example, if a company’s annual dividend is $1.50 and the stock trades at $25, the Dividend Yield is 6%. ($1.50 / $25 = 0.06)
A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.
Lets say there are two companies A Industries, and B Tech. If two companies both pay annual dividends of $1 per share, but A Industries's stock is trading at $20 while B Tech's stock is trading at $40, then A has a dividend yield of 5% while B-Tech is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his or her income would likely prefer ABC's stock over that of XYZ.
Conclusion
Dividend yield is a measure of investor return. While dividend payout ratio judges the amount of dividend in relation to the company's earnings for the period, dividend yield ratio provides a comparison of amount of dividend in relation to investment needed to purchase its share.
A company might be paying out 50% of its earnings but if the company's current share price is too high the investors might not be attracted by even the high payout ratio. A high share price will lead to low dividend yield and vice versa.
