Many investors tend to look at high dividend yielding companies to help them to make good returns from shares. Individuals who tend to hold onto shares for the long term and sometimes also for a lifetime tend to focus on dividend yields.
It's very important to remember that when you are looking at yields from dividend what you should look is for stocks that have a high dividend payout ratio.
For example, many companies pay as much as 50-60 per cent as their net profits as payout ratio. So, a pay our ratin would mean the total dividends paid as a per centage of the net profits.
If company X has a total net profit of Rs 1 lakh and pays Rs 50,000 to the shareholders we say that the dividend payout ratio is 50%.
How to calculate dividend yield?
It's very simple to calculate the dividend yield. All you need to do is know the cost price of the shares and the amount you receive as dividend.
Let's take a simple example. If company A declares a dividend of 10% on a face value of Rs 10, we say the company has declared a dividend of Re 1 per share.
If you have 100 shares, the total amount of dividend you get is Rs 100. If you have paid Rs 1000 for these shares, then your dividend yield would work out as follows:
So, we can say that your dividend yield is 10 per cent.
Things to remember
It's important to remember that if you hold the shares for only six months then your dividend yield would be higher. Also remember that you should look for the book closure date before you select a stock for dividend.
For example, a few companies have book closure in the month of May, June, July and August after these companies have declared their results. There are a few companies that declare regular dividends throughout the year, including stocks like Infosys. The one advantage of investing in high dividend yielding stocks is the fact that at the moment dividends are exempt from tax.