In the share market term, the dividend is the money that a company has to pay to its shareholders from its profits. It is a kind of reward to shareholders for investing in any company. And Dividend Yield and Dividend Payout are two different terms related to companies and shareholders’ dividends.
Dividend Yield vs Dividend Payout
The main difference between Dividend Yield and Dividend Payout is that Dividend Yield is the percentage of the share received by a shareholder for his invested amount in the company. In contrast, Dividend Payout is a part of earning that a company gives as a dividend to its shareholders.
Dividend Yield is the percentage of the amount that an organization is giving dividend on each share compared to the market value of that share. It depends on the board of directors’ decision and is declared generally quarterly, half-yearly, or annually. In simple language, it is telling about the amount that a shareholder will get from the company.
Dividend Payout is the percentage of the amount that a company pays as a dividend to its shareholders from the profit it earned. It is dependent upon the profit earned by the organization in that financial year. It is a part of profit shared by the organization to its shareholders.
Comparison Table Between Dividend Yield and Dividend Payout
| Parameters of Comparison | Dividend Yield | Dividend Payout |
| Definition | It is the ratio of dividend per share to the market value of that share. | It is the ratio of dividend per share to the earning per share. |
| Formula | (Annual Dividend per Share / Market value of share) × 100 | (Annual Dividend per Share / Earning per share) × 100 |
| Use | It is used to find out the amount that a shareholder will get. | It is used to find out what part a company paid from its profit. |
| Compare | It compares dividends to actual market price. | It compares dividends to actual profits. |
| Benefits | It can be either beneficial or bad for investors if it increases or remains the same. | It is beneficial to investors but bad for the company if its value increases. |
What is Dividend Yield?
Dividend Yield is a financial ratio denoted in percentage that shows how much dividend is paid by a company on a share for the market price of that share. It can be calculated by taking the ratio of dividend per share to the market price of that share.
The increase in the percentage of dividend yield always does not indicate a positive sign. The outcome of increased dividend yield could be due to lower stock price, which is not suitable for investment. It helps investors to take steps for investment in an organization.
It can be used to calculate the earning by an investor by taking the dividend price declared by the organization last time. It is their potential income, which can fluctuate according to market conditions at the time of payout. Hence, the investor needs to be aware of the market risks and not just be dependent on high dividend yield.
It can be calculated very quickly by the company’s given portfolio. For example, If a company’s stocks are selling at $20 and pay $2 as a dividend for each share to its shareholders, by using the above-discussed formula, we can find that the dividend yield of this share is 10% which is a high yielding stock.
What is Dividend Payout?
Dividend Payout is a ratio that shows how much dividend a company is giving to its shareholders from its earned profits. It can be calculated by taking the percentage of dividend per share to gain from that share. It ranges from 0% to 100%. Whereas 0% means the company pays nothing to its shareholders as a dividend, and 100% means that the company pays all its profit as a dividend to its shareholders.
As discussed, it is generally between 0% to 100%, but sometimes it can also be negative when the net income of the company becomes negative. Developing companies tend to have less dividend payout than mature companies as they give less dividend because they need to keep profits to re-invest to grow their company.
Dividend Payout is related to Retention Ratio, as dividend payout is profit given to investors, but retention ratio is profit kept for re-investing. A higher Retention Ratio means lower Dividend Payout, but it ensures company growth, resulting in a higher dividend payout in the future.
So while investing, one should pay attention to both aspects because a low dividend payout can pay them a higher payout ratio. Still, a higher dividend payout can lead to a null dividend payout in the future.
Main Differences Between Dividend Yield and Dividend Payout
- The main difference between Dividend Yield and Dividend Payout is that a Dividend Yield is a financial ratio expressing how much dividend an investor gets. On the other hand, a Dividend Payout is a financial ratio representing how much part of profit a company paid as a dividend.
- Dividend Yield is the ratio between dividend per share to the market price of the share. On the other hand, Dividend Payout is the ratio of dividend per share to the earning per share.
- A higher Dividend Yield can also be lost to investors, whereas a Higher Dividend Payout always gives more dividends to investors.
- Dividend Yield value can never go below zero. On the other hand, the Dividend Payout value lies mainly between 0 to 100%, but it can also go below zero.
- Dividend Yield value depends on the market value of the share, whereas Dividend Payout value depends on the profit of organizations and retention ratio.
Conclusion
Share market is becoming a hot topic among the youths, and limited knowledge of this field sometimes leads to disastrous situations. Hence before investing in stocks, one should have proper knowledge about them. Dividend Yield and Dividend Payout are two different terms related to the share market that can help investors make decisions related to investing.
A Dividend Yield is a value dependent on the market value of the share. While a Dividend Payout is a value dependent on the profit earned and retention ratio of the organization. An investor should closely analyze both the terms and understand all the loose ends to take any decision. These simple tips can help them to be away from share market risks.
References
- https://www.sciencedirect.com/science/article/pii/0304405X74900063
- https://journals.sagepub.com/doi/abs/10.1177/0148558×9200700207