What is dividend yield?
Dividend yield = annual cash dividend per share ÷ market price per share. A Tk 3 dividend on a Tk 60 share is a 5% yield. That is, if you bought at today’s price and the dividend stayed the same, 5% of your money would come back in cash each year.
In Bangladesh dividends are usually declared as a percentage of the Tk 10 face value, so a “30% dividend” means Tk 3 a share, not a 30% yield. How to read those announcements is covered in the dividend investing lesson; here we look at what yield tells you as a ratio, and what it doesn’t.
Say Shahana’s flat is worth Tk 50 lakh and brings in Tk 1.5 lakh a year in rent. The rent is 3% of the price; that is the flat’s “yield”. If flats in the area rise to Tk 60 lakh, a new buyer collecting the same rent gets 2.5%. A share’s dividend yield works the same way: when the price changes, the yield changes. The numbers are only an example.
Why it matters to an investor
- To set the dividend against the price: yield, not the declared percentage, tells you how much cash comes back for your money.
- To see one part of total return: a share’s return = dividend yield + price change. Looking only at yield shows half the picture.
- To understand a company’s policy: a low yield isn’t always weakness; many companies keep profits to grow the business.
- To grasp the cost of skipped dividends: under BSEC rules as reported in 2024, a company that pays no dividend for two years in a row can be moved to the Z category. The rule has changed several times and can change again.
Which dividend, which price
- Trailing yield: the dividend actually paid over the past year ÷ today’s price. Based on known facts, but about the past.
- Forward yield: the dividend expected next year ÷ today’s price. Forward-looking, but an estimate.
- Yield on cost: the dividend ÷ the price you paid. Useful for your own income sums, but says nothing about whether the share is dear or cheap today.
- Count cash dividends only. Bonus shares don’t belong in the yield, because no money leaves the company.
Will the dividend last? The payout ratio
Payout ratio = dividend per share ÷ earnings per share (EPS). It shows how much of the profit is being handed out. A 40% payout means 40% of profit goes as dividends and 60% stays in the business. A payout near or above 100% means the company is paying out everything it earns, or more, which can’t go on for long.
Look at cash flow as well as profit on paper. Dividends are paid in cash; if the business is not bringing in enough cash despite its profits, or the company borrows to pay dividends, that is a warning sign.
Comparing it with FDR interest
Many people set dividend yield beside FDR or sanchayapatra rates. The comparison is useful, but not like for like. Deposit interest is fixed by contract and the principal doesn’t move with prices; dividends are not guaranteed, and if the share price falls you can lose overall despite a good yield. On the other hand, dividends can grow over time, which fixed interest does not.
Worked example
- Say a made-up company, “Rupsha Foods Ltd”, earns EPS of Tk 3 and declares a 15% cash dividend: Tk 1.50 a share. Payout = 1.5 ÷ 3 = 50%.
- At a price of Tk 30, trailing yield = 1.5 ÷ 30 = 5%.
- Bad news drives the price down to Tk 20. On the same old dividend, the yield now shows 1.5 ÷ 20 = 7.5%.
- But next year EPS falls to Tk 1. Paying Tk 1.50 would need a 150% payout, so the company pays Tk 0.50. At Tk 20, the real yield turns out to be 2.5%.
Result: the 7.5% yield came from an old dividend and a new, lower price. When a yield looks high, first ask why the price fell, and whether profits and cash can keep the dividend going. The numbers are only an example.
Common mistakes
- Taking the percentage declared on face value for the yield.
- Being drawn in by a big yield built from last year’s dividend and today’s fallen price, without asking whether the dividend can last.
- Ignoring the payout ratio and cash flow.
- Treating dividend yield as guaranteed income, like the fixed interest on an FDR.
Dividend yield = cash dividend ÷ price; when a yield looks high, check the payout ratio and cash flow first to see whether the dividend can last.