The dividend yield is a ratio that indicates the amount of euros that are recovered from the investment with the distribution of the dividends, it is therefore one of the sources of return that a shareholder has, the other is the increase in the value of the share .
It is calculated as the quotient between the dividend per share (DPA) and the market price of that share, multiplied by 100 (therefore, this ratio is measured as a percentage).
Generally, companies that have a higher ratio of dividend yield, can suppose better purchase opportunities . This idea is based on the fact that investors will base their investments on shares that the market values and that they will distribute an “insured” dividend above what the market values the share.
It is a defensive operation for bearish situations or for investors who are looking for a periodic profit in the long term. On the other hand, there are criticisms of the analysis of a company by this method of dividend yield, since it is large companies that tend to distribute profits in a sustained manner over time, but these companies generally have a lower growth rate. to that of the market, since they would need additional resources to finance their growth at the shareholder’s expense. These companies are usually related to sectors such as electricity, energy and banking.
In addition, if we analyze the dividends with respect to the previous year and compare it with this year, we are not making an accurate analysis of business expectations, and if it is about future dividends, we may find ourselves with a lack of security in its distribution, being able induce errors in the calculation of this ratio.
Future uncertainty may add further unknowns about this calculation, since the company could reduce dividends or cancel them, in order to provide more capital to its own resources, as regulators now demand to avoid systemic financial risks.
Example of dividend yield
Suppose a share of a company is listed at 60 euros and that company has paid a total dividend of 1 euro throughout this year, the dividend yield will be equal to (1/60) * 100, having a dividend yield of 1.6%.