A dividend yield is a ratio that shows how much investor gets dividends from the stock compared to its price. It is calculated dividing dividend per share by the share price.
Dividend yield is important ratio for value investors, because if it is stable, dividend yield shows what steady cash flow investor can get from the investment. Usually dividends are more stable than stock prices, so it is easier for investor to predict income from dividends that capital gains on stock price increase.
Dividend yield is some percentage, and for dividend stocks it can be 6%-10%. If the ratio is higher, then the question should be how long can it continue and what was the dividend payout ratio. If payout ratio was over 100% then definitely should raise doubts about sustainability of high dividend yield. Sometimes dividend yield can jump up if stock price decreases but profits don’t suffer.
Remember that dividend yield cannot be the only criterion for investment selection. Even stable companies may choose not to payout any dividends but use stock buybacks as capital return to shareholders form which can be more tax friendly. Many modern companies choose stock buybacks instead of high dividends, however also good practice is to combine these two methods.
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