Dividend yield

The dividend yield measures how much return investors obtain through the distribution of dividends. Next to the PE ratio, it also gives an indication on the attractiveness of a company. Usually, high dividends yields can be observed throughout the market whereas in booming times dividends yields tend to be lower. Dividend yields thus somewhat give an indication of distress and uncertainty in the market. Of course, high or low dividend paying companies are not necessarily high, low or distressed firms.

Dividend yield decomposition

The value of a share depends on the company’s last dividend, the required return and the expected dividend growth rate.

 P = \dfrac{D_0 \cdot (1+g)}{(r_{required}-g)}

From this the dividend yield can be derived from the required return and the dividend growth rate.

 \dfrac{D_0}{P} = \dfrac{(r_{required}-g)}{1+g}

From this it becomes apparent that companies having a high required return, thus a high β, tend to have a higher dividend yield. This is of course depended on the life stage the company is currently in. Young firms are more likely to have a high dividend growth rate, thus reducing the current dividend yield. The return from these kind of investments are expected being realized through share price increases. Mature companies on the other hand have low dividend growth rates, thus higher dividend yields. The total return for investors, will thus depend less on share price increases.

Summary

The dividend yield measure the return investors get from receiving dividends. They measure to some extend the uncertainty in the market or distress of a firm. Mature value companies will have higher dividend yields, young growth companies have lower dividend yields.

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Dividend yield

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