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What is the dividend yield?

In the second of his online video tutorials, MoneyWeek deputy editor Tim Bennett explains another of the most popular measures for comparing stocks – the dividend yield

• See also: Are your dividends safe? An explanation of the dividend cover ratio.

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Dividend yield

Holders of ordinary shares in a company are paid a percentage of that company’s profits every year. The payment is called a dividend. The percentage is not worked out using an exact formula, but decided by the board and approved by shareholders at the AGM, depending on the company’s performance and priorities. The dividend per share (total dividends paid out divided by total number of shares) expressed as a percentage is referred to as the dividend yield.

So if a share is trading at 100p, and the dividend paid out last year was 2p, the yield is 2%. This is a popular measure for comparing stocks, but note that it is retrospective – telling you what the company paid out last year, not what it might pay out next. A low yield often – but not always – suggests a fast-growing company not yet making much profit. Investors will accept a low yield now in exchange for an anticipated high yield in the future. A high yield often indicates either a very risky or slow-growing company; investors demand a higher yield as compensation to invest in either.

• Entry from MoneyWeek’s Financial glossary

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One Response

  1. 18/09/2014, dfl3tch3r wrote

    This is where traders can help educate investors….For instance investing would seem to most, less riskier than trading. I would say not so! A trader knows exactly what his risk amount is to the nearest penny by the use of a stop loss. Because of this he can use leverage in order to run profits and avoid chasing losers. A technical trader does not care which company he trades so he’s not emotional about the stock to begin with. A trader usually has a ‘system’ so he avoids Recency Bias. A trader isn’t looking for the cheapest price or ‘bargain’ stock; if he’s a technical trader he’s simply interested in the pattern, and so forgets the cheapest price and waits for a trend change instead. Not always but more often a trader is least affected by emotions. Apply this to investing and you’ll do well.

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