What is a dividend yield?
Before tackling the definition of a dividend yield it is important to understand what the term ‘dividend’ and ‘yield’ means.
Put simply, a dividend is a specific amount of a company’s profits paid out to shareholders. It is designed to reward shareholders for holding the company’s stock and is at the company’s discretion. Each year at the company’s annual general meeting, the board will propose a dividend amount or no dividend, and shareholders will vote on the proposed amount. The dividend is paid per share, so a $1 dividend on 100 shares is $100.
If a yield is the income from an investment, a dividend yield is, therefore, a helpful indicator that can show how much a company pays out in dividends each year in relation to its stock price. Dividend-paying stocks have remained a popular choice for investors due to the regular stream of income they can provide.