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Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

Table of contents
14. Financial Statement Analysis

Ratios: Dividend Yield Ratio


Ratios: Dividend Yield Ratio

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let's check out a ratio here. The dividend yield ratio. Alright, so the dividend yield ratio, it's gonna show how much dividends we yield when we own a share of stock. Right? It's a percentage of the market stock price distributed as dividends. Okay, so the dividend yield ratio. This is a market value ratio. These market value ratios. Well, they're going to use the market value of the stock, right? Any stock we can look it up on the mark, that's by a public company, Apple Stock Microsoft, whatever it is, you look it up on the stock exchange and it's got a market price. Right? So this market price is going to have to be given to you in the questions and you're gonna use it to solve for the dividend yield ratio. Right? So the ratio is as we see here notice in the in the numerator, we've got the dividends per share. So remember its per share of common stock, The dividends per share that they receive divided by the market price per share. So it's gonna say something like, you know, the market price of the stock is $20, something like that in the question. So we usually show this as a percentage and that's why we multiplied by 100 here. So we show this as a percentage. So what does the dividend yield ratio tell us? Remember this is a ratio that's used by investors to see whether or not this is a good investment or not or it fits their portfolio. So what it tells us, it's the amount of cash dividends that they receive, per dollar invested, Okay, per dollar invested in this stock. So how much dividends are you getting per dollar? And that's a good number. When you think about it, you can compare across different companies when you look at different dividend yield ratios. Well that's how much percentage you're gonna get back as cash when you invest in this stock. So remember, there's gonna be two ways that we make money when we invest in stock. The first one is through dividend payments, right? Because these are actual cash returns, you own a piece of stock and you're getting some money. So that is a return on your investment. Let me get out of the way here. So you can see the rest of this. But there's another way that we make money too right. The investors in the stock, they also get a return through capital appreciation. Okay, and this means that, say you paid $20 for a share of the stock and now the stock is worth $25. Well when you sell it, you're getting that $5 appreciation right from 20 to 25, you get money that way as well. So there those are the two ways we make money and we think when when we think about a dividend yield ratio, well we might see a low dividend yield ratio or a high dividend yield ratio. Well, either way it can be seen as a good thing or a bad thing. Companies that don't pay dividends or pay small dividends, it's not necessarily a bad investment, small dividends tend to mean that that company is reinvesting their earnings right, since they're not paying dividends while they're taking the money that they earned during the period and reinvesting it into the business, right? So when they reinvest into the business, well, that means that they're gonna be growing right? And we would expect to see capital appreciation, we would see the stock price going up. The other, the other side of it is high dividends. When we see high dividends. Well, this is seen as stable realized income, right? Because you're actually getting cash back from your investment. So when you have a high dividend yield ratio, this is, this feels more like a stable investment, that you're actually getting cash returns from where the small dividend ratio. Well, you're seeing this as a growth opportunity, right? So in the end this is a pretty easy ratio to calculate, we just have to calculate our dividend per share. Sometimes they might give you the total dividends paid to all the investors and then a number of shares. Well, you'll have to get the dividend per share by dividing the two, And then the market price per share, they'll usually just tell you $20,, whatever it is. Okay, so let's go ahead and jump into some practice and you guys try and calculate the dividend yield ratio. Alright, let's do it now

During the current year, PayCo declared and paid a cash dividend of $600,000. The number of shares of common stock outstanding is 1,000,000. If the current market price of the stock is $15, what is the dividend yield ratio?


ABC Company’s common stock currently has a market price of $20, while total stockholders’ equity has a book value of $600,000 (60,000 shares outstanding). During the current year, ABC Company maintained a dividend yield ratio of 8%. What was the total amount of dividends paid to common stockholders?