Stock market is not only a place to build corpus through diligent investments but also can help investors get a steady income source. Here comes into picture dividend paying stocks and often most people fail to distinguish between dividend rate and dividend yield that are significant metrics for these companies. So, here is detailed the difference between the two terms.
Dividend rate: Dividend rate or simply called dividend is primarily the total dividend payment expected on any investment, be it stock, mutual fund or any other any other money market security. Based on the strategies and preferences adopted by the dividend paying company- the dividend rate can be adjustable or fixed. Dividend rate is decided by the board of directors of the dividend paying company that is later approved by its shareholders. Note dividends are paid either on a quarterly or an annual basis.
On the other hand, dividend yield is a financial ratio suggesting how much a company pays in dividend every year as against its current stock price. Expressed in percentage terms, dividend yield is an assessment of the dividend-specific return of an investment. Now as stated earlier, the dividend rate can either continue to be the same as that of the previous fiscal year, or it can see an increase or decrease.
Likewise, if the dividend amount continues to be the same, the yield shall increase when the stock price corrects and vice-versa.
Dividend yield=Annual dividend payment/ stock price
Illustration to understand the difference between dividend rate and dividend yield
Say if you invest Rs. 1,00,000 in 'X' company and in respect of which you are allotted 1000 share units. This 'X' entity then declares a dividend of Rs. 5 per share- this is the dividend rate. Herein you will receive a total dividend of Rs. 5000. So, dividend yield here can be calculated as below:
Rs.5,000 x 100/100000 = 5 per cent
Note here as the current stock price is not known/silent, yield is calculated considering the total investment amount.
Knowing the difference between dividend rate and dividend yield considering book closure and ex-dividend
The formula listed above shall be applicable to investments maintained for the whole fiscal year, nevertheless, based on the book closure of the stock, you need to determine yield for shorter investment horizons. Say, in the above case if the 'X' company's book closure is on 1st July and you bought the shares on 1st January, you will be getting a yield of 10 percent. This is because here the shareholding period is just six month as against a complete one year.
Considering the ex-divided aspect, which is the date post which you are not entitled or eligible to receive company dividends in a particular fiscal year, will also be crucial here. Say in case this 'X' company announces book closure to be on 25th July and the ex-dividend date is declared to be as 20th July then after this you will not be receiving dividends from the company.