What is Dividend Yield in the Share Market?

When investing in stocks, most people focus on capital appreciation buying a stock at a lower price and selling it at a higher price. However, there is another way to earn from stocks: dividends. Companies distribute a portion of their profits to shareholders in the form of dividends, and the dividend yield helps investors assess how much return they are getting from these payouts relative to the stock price.

Dividend yield is a crucial metric for income-focused investors who prefer steady returns over volatile stock price movements. In this blog, we will cover everything you need to know about dividend yield, how it is calculated, its importance, and strategies for dividend investing.

What is Dividend Yield?

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is expressed as a percentage and helps investors understand how much return they are getting from dividends alone.

The formula for Dividend Yield:

Example Calculation:

If a company pays ₹10 per share annually as a dividend and its current stock price is ₹200, the dividend yield is:

This means the investor earns a 5% return per year from dividends alone, excluding stock price movements.

Why is Dividend Yield Important?

1. Consistent Income for Investors

Dividend-paying stocks provide regular cash flow, making them attractive for retirees and conservative investors who prefer steady income over capital gains.

2. Indicator of a Stable Company

Companies with consistent dividend payments often have strong financials and stable earnings, indicating long-term sustainability.

3. Better Returns During Market Volatility

Even if stock prices fluctuate, dividends ensure some level of return, reducing the impact of market downturns.

4. Helps in Portfolio Diversification

A mix of dividend-paying stocks and growth stocks creates a balanced portfolio, ensuring both steady income and capital appreciation.

Types of Dividend Yield Stocks

Not all companies pay the same level of dividends. Understanding the different types of dividend stocks helps investors choose the right ones based on their goals.

1. High Dividend Yield Stocks

• These stocks offer above-average dividend yields, usually above 5%.
• Typically found in sectors like utilities, real estate, and FMCG.
• Example: Coal India, known for high dividend payouts.

2. Low Dividend Yield Stocks

• These stocks pay dividends, but the yield is below 2%.
• Mostly in growth sectors like IT and technology.
• Example: Infosys and TCS, which focus more on expansion rather than dividend payouts.

3. Dividend Growth Stocks

• These companies increase dividends over time, showing strong financial health.
• Example: HDFC Bank, which has consistently raised dividend payouts over the years.

4. No-Dividend Stocks

• Some companies do not pay dividends and instead reinvest profits for future growth.
• Example: Zomato and Paytm, which are still in expansion mode.

How to Identify Good Dividend Stocks?

Not all high-yield stocks are good investments. Here are key factors to consider before selecting dividend stocks:

1. Consistency in Dividend Payments

Look at a company’s dividend history for at least 5-10 years. A good dividend stock should show stable or increasing dividend payouts over time.

2. Dividend Payout Ratio

A payout ratio between 30% and 60% is ideal. A very high ratio (above 80%) may indicate the company is not reinvesting enough in growth.

3. Strong Financials

Check the company's revenue, earnings growth, and debt levels. A company with rising profits and low debt is more likely to continue paying dividends.

4. Industry Stability

Industries like utilities, FMCG, and banking tend to have stable earnings and reliable dividends, whereas tech and startups usually reinvest profits instead of paying dividends.

Is a High Dividend Yield Always Good?

A high dividend yield may seem attractive, but it does not always indicate a strong company. Here’s why:

• Some companies offer high dividends but struggle with low growth. They may not reinvest enough in expansion, limiting their future potential.
• Certain companies borrow money or give dividends despite losses, which may not be a sustainable practice.
• A sudden spike in dividend yield could be due to a declining stock price, which might indicate company instability.

Thus, investors should not judge a stock solely based on its dividend yield. Instead, it is important to check company fundamentals, dividend history, and reinvestment strategies.

Comparison of Dividend Yield Across Sectors

Investors looking for stable income prefer high dividend yield stocks, while those focusing on long-term growth prefer capital appreciation stocks.

Dividend Yield vs. Capital Appreciation: Which is Better?

Dividend Yield in the Indian Stock Market

Top Indian Stocks with High Dividend Yield (2024 Data)

High-dividend stocks provide steady returns even in volatile markets, making them a great addition to an income-focused portfolio.

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With access to detailed market reports and financial data, investors can use TradingBells to analyze dividend yield stocks and build a stable income-generating portfolio.

The Role of Dividend Payments in Different Types of Companies

1. Public Sector Undertakings (PSUs) and Dividend Obligations

Public Sector Undertakings (PSUs) in India are mandated to pay dividends as they are government-owned and expected to return profits to the public exchequer. Companies like Coal India, ONGC, and NTPC consistently declare high dividends, making them attractive for income-seeking investors.

However, many PSUs also face limited capital expenditure (capex) and slow business expansion, which affects long-term stock growth. While their dividend payments are reliable, investors must assess whether they align with their long-term investment strategy.

2. Private Companies and Dividend vs. Capex Decisions

Unlike PSUs, private companies have more flexibility in deciding whether to distribute dividends or reinvest profits. Some high-growth companies prefer reinvesting profits into business expansion rather than paying dividends.

For example:

• HDFC Bank and Infosys follow a balanced approach, paying dividends while continuing capex for growth.
• Zomato and Paytm focus entirely on expansion and do not pay dividends.
• ITC and Hindustan Unilever (HUL) regularly pay dividends, making them attractive for investors looking for stable income.

Is Only Paying Dividends Good? Or Only Capex? Or a Mix?

Companies must strike a balance between dividends and capital reinvestment.

• Only paying dividends with no reinvestment could lead to stagnation and limited future growth.
• Only doing capex with no dividends means investors won’t receive any immediate returns, making stocks less attractive for income-focused investors.
• A mix of both is often ideal. Companies that maintain strong earnings, reinvest for growth, and provide dividends tend to attract both growth and income investors.

For example, ITC maintains high dividend payouts while continuing expansion, making it a preferred choice for many investors.

Final Thoughts

Dividend yield is an essential metric for investors who seek steady returns along with stock price appreciation. While high-dividend stocks offer regular income, not all high-yield companies are good investments stability, financial health, and dividend consistency are key factors to evaluate.

For long-term investors, a balanced portfolio of dividend-paying stocks and growth stocks can provide both financial security and wealth growth. Understanding dividend yield helps in making smarter investment choices, ensuring a steady stream of income while building long-term wealth.