What Do The Dividend Yield And Dividend Payout Ratios Tell An Investor?

Dividend yield and dividend payout ratio are great matrices to find out if one should invest in a stock if you are looking for dividend income. Although the dividend yield is different than the dividend payout ratio. In my opinion, the dividend payout ratio is a more important and comparatively more stable indicator. Because it shows what percentage of profit the company pays out as dividends. If it is too high, like in some mature businesses, that might be an indicator that the business has run out of ideas to invest in, or in other words, they are not seeing any growth opportunity where they can put the free cash and grow. You can check the dividend payout ratios for companies like BP, Glaxo, etc. You will see, they pay out most of their cash and end up with very little to invest or as CAPEX.

Now, if the payout ratio is low, that should be reassuring. It means the company is investing in growth opportunities or it can maintain dividend amount even if earning/ profit falls, like it is bound to fall 2020 – 2021.

The dividend yield is a more fluid indicator. Like when in March 2020 all stocks were crashing down, the dividend yield was increasing with every fall. And when the stock price shoots up, the dividend yield shrinks. There are many reasons when the dividend yield will increase. Otherwise, here is a rough idea about dividend yield. Say Stock X is trading at $100 for 1 share and the dividend yield is for that stock in 5%. That means, for holding 1 stock for a year you will receive $5 ( pre-tax) as a dividend. Usually, in the USA companies pay dividends every quarter, so, you will get $1.25 as dividends every quarter. There are some ETFs those pay dividend every month. Anyway, in case you want to learn about dividend income strategy, check out this article.