Dividend Yield OR Dividend Percentage
"The stock market is filled with people who know the price of everything, but the value of nothing." - Philip Fisher
Growing economic uncertainty in the world and the recent spate of scams in India has investors worried. In light of the scams especially, the importance of good corporate governance is being felt like never before.
The investors are making a beeline for stocks in the large cap space. The perception being that these companies have better disclosure practices, so the probability of scams erupting in this space is much lesser than in either the midcap or small cap space.
What has also enthused investors is the steady income that these companies offer by way of dividends. The fact that dividend income is tax free in the hands of investors is an added advantage, until recently when government imposed 10% tax on dividend income that is in excess of Rs. 10 lakhs threshold in a year.
So many investors are lapping on to stocks where the dividend payout is good even though the valuations are expensive.But this may not be such a wise move. The investors need to look at dividend yield of companies while investing in their stocks.
Dividend yield is nothing but the company's dividend per share divided by its stock price. Thus, even if the dividend paid out is good, if the stock price is very high, the yield will not be that great.
At the end of the day, when investing in equity markets, an investor has to look at two factors. One is the benefits of capital appreciation. The other is the dividend yield. The two combined would constitute the total return that would accrue to an investor.
This return will not be strong, if the stock price of any company is disproportionately high.Thus, strong corporate governance, good growth prospects and a healthy dividend policy are certainly prerequisites for investing in equities. But always keep an eye on valuations too.