The dividend yield (D.Y) is often referred to in common parlance simply as a 'dividend'. Mathematically it can be calculated by the dividend-price ratio i.e. the D.Y of a share is the dividend per share, divided by the price per share.
It can also be summarized as a company's total dividend payments (annual) divided by its market capitalization (Here the underlying assumption is that the amount of shares always remain constant). The D.Y is typically expressed in a percentile value.
Dividend Yield = Annual Dividend / Current Stock Price
Here as an example we will make the assumption that that you own approximately 1000 shares of a company, let’s call it AB. Each share of the aforementioned company pays $2 of annualized returns as dividends.
If the stock price as of today is $10, then as per this formula the dividend yield of the company may easily be calculated as:
$2 / $10 = 0.2 = 20%
Here it can clearly be seen that there’s an inverse relationship between total dividend yield vis-à-vis the current stock price.
So if the company's per share value were to increase to $12, the yield will drop to 16.7%.
While the original investment would still reap greater returns and would surge higher, nevertheless the yield percentile would take a steep drop. And the investment would be worth more but the yield on the investment would fall from 20% to 16.7%.
Dividend yields remain constant unless changed by the company itself
Another thing to note about dividend yields is that they remain constant, I.e. until and unless the company changes its dividend policies you would still be receiving an estimated $2 per share and that has nothing to do with the rise or fall of the price of the stock in the share markets.
D.Y as a measurement of cash flows
D.Y is by far the simplest measurement of much cash flows are being generated from an investment. This hold especially true where there are no capital gains and D.Y is the only effective measurement of ROI (Return on investment).
Financial education is so important, but barely taught at all in our schools. Having resources online is great, but not if they are inaccessible to so many. Thanks 508!