Dividend yield definition and Ex-Dividend Defined
A company is usually financed by a number of stockholders who have invested some money on a company and in return they have a percentage of the shares. As a shareholder, they would be entitled to dividends given out by the company every year.
Normally when a company earns money out of its production, after retaining a certain amount, they would give out the rest of its earning to its shareholders as dividends. In short, after investing your money on a certain company, naturally if the business is good they should be able to earn a certain amount. This amount is what you give back to your investors.
A dividend yield indicates how much one gets for a certain stock. It is computed as dividends that are given out annually, divided by the price per share. As an investor, they usually look at these data to see which stocks or companies are worth investing in.
Thus, if two companies give out the same dividends, it doesn’t automatically mean that they would have the same dividend yields because it would greatly depend on a price per share. And so let us look at the following example:
Company A Dividends: $10
Price Per Share: $20
Dividend Yield: 50%
Company B Dividends: $10
Price Per Share: $40
Dividend Yield: 25%
Based on this, one could assume that just because a stock has a higher price per share does not necessarily mean that it has higher Dividend Yield. And for sure they would prefer the stocks of Company B.
Some investors would prefer stocks with higher dividend yields as it means they could get more money for what they have invested in. However, some would say that having high divident yields could indicate an underpriced share and may mean that the company would not earn soon. It’s still an ongoing discussion about the importance and accuracy of dividends yields. Well, there is always two sides to a coin.
In relation to this, there is also the Ex-Dividend which is important to understand. Once the Ex-Dividend Date is declared, whoever owns the stock during that time will receive the dividends declared, however after receiving such dividends, anyone who buys these stocks will no longer benefit from receiving dividends. Naturally the price for these stocks would also decrease as there would be lesser demand for them.
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