In the stock market, not all the tools of fundamental analysis work for every investor on every stock. If you are looking for stocks for intraday trading, you might look into volatility and beta associated with the stocks.

Similarly, if you are looking for dividend income, a couple of parameters are specific to you. One of the telling parameters for dividend investors is dividend yield.

So, let us look at everything about the dividend yield parameter in stocks.

Dividend yield, also as dividend-price ratio, is the ratio of a stock’s annual dividend payout and its current stock price.

It is expressed in terms of percentage and is calculated as follows:

Dividend Yield = (Annual Dividend per share / Current share price) * 100

For example,

Let’s assume a company’s annual dividend is Rs.1.50 per share and the stock trades at a price of Rs. 25, the dividend yield is: (Rs. 1.50 / Rs. 25)*100 = 6%

Note that there is an inverse relationship between dividend yield and stock price.

Check Out the 10 Best Performing Stocks in 15 Years

So, if the stock price rose to Rs. 35, the dividend yield would be (Rs. 1.50 / Rs. 35)*100 = 4.3%, which is a fall of 1.7%.

But the dividend you get stays the same. Meaning, even though the stock price falls (or rises), you still receive Rs. 1.50 per share (unless the company changes the dividend).

Depending on the stock price movement during the day, the dividend yield is constantly changing as the price changes.

What Is the Significance of Dividend Yield in Stocks?

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Or to put it in simple words, it is a method used to measure the amount of cash flow you are getting for each rupee you invest in a stock.

It is an easy way to compare the relative attractiveness of various dividend-paying stocks in the market. Along with telling an investor the yield he/she can expect by purchasing a stock.

Most bluechip companies pay a regular quarterly dividend around the same time every year and are predictable to investors.

For a company that has its stock price on a rising trend, it will need to raise its dividend payout in order to maintain its dividend yield. For example: if a stock goes up by 20%, but does not raise its dividend, its yield will drop significantly.

When Can You Expect a High Dividend Yield?

Dividend yield depends on two factors:

1. High Dividend Payout by the Company

If a company pays out high dividends, the stock can be expected to have a high dividend yield value (provided its market price remain constant along with no. of stocks).

But remember that paying out high dividend can also cost a company in growth potential. Every rupee a company pays out to its shareholders is money that the company isn’t reinvesting in itself to make profits.

2. Tanking of Share Price

Many times a high dividend yield is the result of a decrease in stock’s market price.

Mathematically, the dividend yield will rise because the price is dropping and this type of scenario is often referred to as a value trap.

So, investor beware of this case.

Biggest Misconceptions About Dividend Yield Stocks

Here are the 3 biggest misconceptions of dividend yield in stocks. Understanding them would help you choose better dividend stocks.

1. High Dividend Yield Stocks are the Best Option

The biggest misconception of dividend yield in stocks is that high dividend yield is always a good thing.

Many dividend investors simply choose a collection of stocks with the highest dividend yield and hope for the best. For many reasons, this is not always a good idea.

These sectors might generate great returns for investors in the coming years.

2. Dividend Yield Stocks are Boring

When it comes to high dividend yield stocks, most investors think of utility companies and other slow-growth businesses.

They believe that the company is paying a high dividend as they don’t have enough future growth strategy, which is absolutely false.

3. Dividend Yield Stocks are Safe

High Dividend Yield stocks are known for being safe and reliable investments. As many of them are top value companies and belong to large-cap stocks.

But just because a stock is producing high dividend yield, doesn’t always make it a safe bet for investment.

Sometimes, the management of a company can use the dividend to placate frustrated investors when the stock price is not moving and many companies have been known for this.

Therefore, to avoid dividend yield traps, it is always important to at least consider how management is using the dividend in its corporate strategy.

5 Indian Stocks With the Highest Dividend

India’s Top 5 Stocks With the Highest Dividend Yield
Stock Name 52 week high 52 week low Market Cap (Cr) PE Ratio 1 yr Return Current Price
Ingersoll-Rand (India) Ltd. 914.90 469.00 1,901 21.4 -10.0% 640.00
Wall Street Finance Ltd. 0.00 0.00 33 1.2 -12.4% 29.10
Indian Oil Corporation Ltd. 177.20 105.25 144,507 6.6 -7.9% 154.45
Vedanta Ltd. 290.40 145.80 60,739 5.9 -42.3% 170.35
Procter & Gamble Health Ltd. 3994.00 1830.00 6,164 65.6 69.6% 3975.00
Sr. No. Name of Company Stock Price (Rs.) Dividend Yield (%)
1 Ingersoll-Rand (India) Ltd. 619.00 33.55
2 Wall Street Finance Ltd. 27.00 15.71
3 Indian Oil Corporation Ltd. 157.50 13.29
4 Vedanta Ltd. 168.30 12.60
5 Merck Ltd. 3686.00 11.94

The Bottom Line

An investor who wants to put together a portfolio generating high dividend income should place great scrutiny on a company’s dividend payment history and alignment to its corporate strategy.

Only those stocks with a continuous record of steadily increasing dividends over the past 15 – 20 years or longer should be considered for inclusion in the portfolio.

Furthermore, the investor should be convinced the company can continue to generate the cash flow necessary to make the dividend payments regularly.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww