What is a Dividend Yield?
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is an essential metric for investors, particularly those who focus on dividend growth investing within the broader spectrum of growth investing.
Understanding Dividend Yield
The formula for calculating dividend yield is:
Dividend Yield = Annual Dividends per Share / Price per Share
For example, if a company pays an annual dividend of $2 per share and its current stock price is $40, the dividend yield would be 5%.
Importance in Growth Investing
In the realm of dividend growth investing, the dividend yield helps investors evaluate the income they can expect from an investment relative to its cost. Higher yields might indicate a potentially attractive investment, although they can also suggest underlying risks if the yield is significantly above the market average.
Investors should also consider the company’s ability to sustain and grow its dividends over time, as this growth can lead to higher yields and overall returns on investment.
Conclusion
In summary, understanding dividend yield is crucial for making informed investment decisions in dividend growth investing. It allows investors to assess both current income and the long-term value of their investments.