What Is Dividend Yield?
To understand the dividend yield, we need to start with the definition of a dividend.
A dividend is a payment made by a company to its owners, also known as stockholders or shareholders. Generally, the dividend payment represents a portion of the current year’s net earnings, but sometimes special dividends are paid out, which are funded with retained earnings or large asset sales.
The dividend yield is a financial ratio that measures annual dividends paid by a company relative to the current price of its stock. The number provides an estimate of the amount of dividends you could expect to receive each year if you were to invest one dollar in the stock.
Why Is Dividend Yield Important?
Dividends are an important source of income for some equity investors, just as interest income is important to bond investors. While everyone likes investment income, a steady stream of income is especially important to retirees, who often rely on the extra cash flow to live.If your personal finance plan includes equity investments, the dividend yield can provide an estimate of the income you can expect to receive from the money you invest in equities. This knowledge is valuable for planning purposes and can help you make informed decisions about where to invest your savings.