Dividend, Dividend Yield and Dividend Payout Ratio

Every year companies distributes the profits earned in the financial year to the share holders. The dividends are given either as interim dividend or final dividend to the share holders.

Dividend Payout Ratio : No company will distribute the entire profits to the share holders, some portion of the profit is kept as reserves with the company to meet the needs of operational needs or future expansion plans. The percentage of the profits that are distributed to the share holders is called as Dividend Payout Ratio.

Companies with higher Dividend Payout Ratio denotes that the companies management does not having expansion plans or Company reached its saturation point. You should always choose a company with Payout Ratio less than 75%. PSU (Public Sector Units) are best known for their huge Dividend Payout Ratio.

Dividend : The per share value of the profits given to share holders is called dividend. Companies provide dividends to reward the share holder for holding their company stocks and increase the trust of the company. If a company reports profits but not paying out dividends then something wrong happening with the company make sure the cash flows are correct.

Dividend Yield : Dividend yield denotes the dividend as a percentage of the Current Market Price of the Share.

Dividend Yield = Dividend / Current Market Value

Dividend expressed in terms of Face Value of a Share. Hence it is always better to consider the Dividend Yield over Dividend of a stock.

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