What is dividend? How is dividend yield calculated?

Each year, a profitable company declares an amount of money to be paid to the shareholders from the profits of the company. These are called dividends.

What are dividend yields?

It's important to invest in companies that offer a high dividend yield. Let's calculate dividend yield with the help of an example. Say you bought shares of Company A at Rs 100 and you bought 10 shares of the same.

The total cost for you would be Rs 100 x 10 = Rs 1000. Say the company declares a dividend of Rs 1 per share. So, you would receive Rs 10 as dividend for the 10 shares you hold.

So, on an investment of Rs 1000, you got a dividend of Rs 10. The dividend yield thus works out to 1 per cent.

Remember, if you have bought the stock and held it for only 6 months and received dividends your yield would double. Similarly, for other holding periods.

There are many stocks that today offer very high dividend yields. A particular mention must be made of public sector banks, most of which are quoted at very low rates, making their dividend yields attractive.
Andhra Bank, IDBI Bank, Indian Overseas Bank are just a few names.

Apart from the share price appreciation that one gets from investing in shares of companies, one also gets dividends, which helps in capital appreciation.

How much dividend a company would declare depend upon profitability and what the board of directors recommend. If a company makes losses, it's most likely that it will not declare dividends, unless it chooses to do so from the free reserves that have accumulated over a period of time.

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