Profitability and efficiency ratios
Dividend yield and payout
3 min
Dividend yield measures the cash income a share pays relative to its price — the return you receive without selling anything.
The formula
Dividend yield = Annual dividends per share / Share price
Worked example: a share pays 2.40 in dividends a year and trades at 30.00:
Dividend yield = 2.40 / 30.00 = 8%
The payout ratio
To judge whether a dividend is safe, check how much of profit it consumes:
Payout ratio = Dividends / Net income
If EPS is 1.50 and dividends per share are 2.40, the payout is 2.40 / 1.50 = 160% — the company is paying out more than it earns, which is unsustainable and a red flag.
How to read it
- A moderate yield with a comfortable payout (say 30-60%) signals a healthy, cash-generative company sharing profit while retaining enough to grow.
- A very high yield is often a warning, not a gift: it usually means the price has collapsed because the market expects the dividend to be cut.
- Low or zero yield is normal — and often correct — for fast-growing companies that reinvest every dollar at high returns instead of paying it out.
Yield is attractive for income, but never chase it without checking the payout ratio and the free cash flow behind it.
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