Dividend Yield vs Dividend Rate: Understanding the Difference
While dividend yield refers to the percentage of the current stock price of a company paid out as dividend over a year, dividend rate is the amount of money that company pays to its shareholders as dividends on per-share basis.
In this article on “Dividend Yield vs Dividend Rate”, we will be discussing the difference between the two.
Table of Contents
Dividend Yield vs Dividend Rate: Differences
Let us understand the difference between dividend yield and dividend rate.
| Parameter | Dividend Yield | Dividend Rate |
| Definition | Percentage of the company’s current stock price that is paid out as dividends over the course of a year. | The amount of money a company pays out to its shareholders as dividends on a per-share basis. |
| Calculation | Dividend Yield = Annual Dividend per Share / Current Stock Price) x 100% | Dividend Rate = Annual Dividend per Share |
| Frequency | Expressed as an annual rate but it can also be calculated either on quarterly or monthly basis | Expressed as an annual rate but it can also be calculated either on a quarterly or monthly basis. |
| Purpose | Helps investors assess the income potential of a stock investment. | Helps investors understand how much income they will receive per share from their investment. |
| Effect on Stock Price | Inversely related to stock price – as stock price increases, dividend yield decreases (assuming dividend remains the same). | Not directly related to stock price – changes in dividend rate do not necessarily impact stock price. |
| Example | If a company pays an annual dividend of $2 per share and its stock price is $50, the dividend yield would be 4%. | If a company pays a quarterly dividend of $0.50 per share, the annual dividend rate would be $2.00 per share ($0.50 x 4). |
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What is Dividend Yield?
Dividend yield refers to the ratio that shows the amount of income that you earn in dividend payouts annually for the amount invested. It is the security’s annual dividend payment expressed as a percentage of the current price. By calculating this percentage, you get the annual return on investment at the price paid for the security.
Calculation of Dividend Yield
For calculating the dividend yield, the total annual dividend amount of the stock is divided price per share.
Dividend Yield = Dividends Per Share / Price Per Share
Suppose that the share price of a public company is $50, where the annual dividend is $2 for every share. In such a case, the dividend yield is 0.03 x 100 = 3%. Assuming the dividend payout will remain unchanged, the percentage would be 3% annually.
Factors Impacting The Yield
The following factors impact the dividend yield of any company:
- Dividend Policy: The earning distribution of dividends among shareholders is affected by the dividend policy of the company. A consistent and stable dividend policy ensures a higher yield.
- Financial performance: When the cash flow is high and the company is making profits, it results in a higher dividend payout. This results in increased yield.
- Payout ratio: It is the proportion of earnings paid out as dividends to shareholders. A higher payout ratio results in a higher dividend yield. This indicates that the company is paying out of its pocket. Due to this, the company is unable to invest its earnings for reinvestment and growth.
- Rate of interest: When the interest rate is low, investors look for sources that can generate higher income. This increases the demand for dividend-paying stocks leading to a rise in the prices of these stocks. However, this lowers the dividend yield.
- Market conditions: Overall, market conditions impact the dividend yield of any company. When the stock market is performing well, investors accept the lower dividend yield. On the other hand, in the bear market, investors require a higher dividend yield to compensate for increased risk.
- Profitability: When the company starts making a profit, it gains the ability to pay out dividends since it has more resources.
Let us now understand dividend yield in detail:
What is Dividend Rate?
This rate refers to the total expected dividend payments from the investment, portfolio and fund on an annualized basis. This includes any additional non-recurring dividends that investors may receive during that period. It may either be fixed or stay adjustable depending on the preference and strategy of the company.
Calculation
To calculate the rate of a portfolio, fund or investment, it is important to collect data on the recent periodic dividend payments. Then you need to multiply these periodic payments by the number of payment periods in a year. Let us now understand the calculation part with the help of an example.
Let us say that the invested funds pay a dividend of 50 cents in a quarter. Along with that, it pays an additional dividend of 20 cents per share due to non-occurring event from the company that is being benefitted. The rate will be (50 cents x 4 quarters + 20 cents) is $ 2.20
Factors Impacting Dividend Rate
The following factors impact dividend rate:
- Earnings: The company’s earnings and profits are a major determinant of its ability to pay dividends. If a company’s earnings increase, it may choose to increase its dividend rate, while a decrease in earnings may result in a decrease in the rate.
- Financial Health: A company’s financial health, including its cash position, debt levels, and overall financial stability, can impact its ability to pay dividends. When a company faces financial difficulties or has high debt levels, it may reduce or suspend its dividend payments.
- Business Strategy: A company’s business strategy, such as its growth plans, may impact its dividend rate. If a company is investing heavily in growth initiatives, it may choose to reduce its dividend rate to conserve cash for those initiatives.
- Shareholder Preferences: The preferences of a company’s shareholders can also influence its dividend rate. If a company’s shareholders place a high value on dividends, the company may be more likely to maintain or increase its dividend rate, while a shareholder base that prioritizes growth may be more accepting of a lower dividend rate.
- Regulatory Environment: The regulatory environment, including tax laws and regulations related to dividends, can also impact a company’s dividend rate. Changes to tax laws or regulations may affect the amount of cash available for dividend payments or the tax treatment of those payments, which may impact a company’s decision to pay dividends.
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FAQs
What is considered a good dividend yield?
It varies by industry and market conditions. Generally, a dividend yield between 2% and 6% is considered attractive. However, extremely high yields may signal underlying financial troubles or unsustainable dividend policies.
How does stock price affect dividend yield?
If the stock price increases and the dividend remains the same, the dividend yield decreases. Conversely, if the stock price decreases, the dividend yield increases, assuming the dividend remains constant.
Can dividend yield be negative?
Dividend yield cannot be negative because it is a ratio of the dividend per share to the stock price. A company can stop paying dividends, resulting in a 0% yield, but it cannot pay a negative dividend.
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