The key difference between dividend and dividend yield is that dividend is the return paid for the ownership of shares in a company whereas dividend yield is the amount of dividends that a company pays as a proportion of its share price. Investors purchase shares in a company with the expectation of a return through share price appreciation and dividends. A favorable dividend per share and dividend yield are vital to maintaining existing shareholders as well as to attract new investors.
CONTENTS
1. Overview and Key Difference
2. What is a Dividend
3. What is a Dividend Yield
4. Side by Side Comparison – Dividend vs Dividend Yield
5. Summary
What is a Dividend?
Dividend is defined as the return paid for the ownership of shares in a company. Dividend payments can take two main forms known as cash dividend and stock dividend.
Cash Dividend
Cash dividend is paid out of net earnings and is preferred by many shareholders as it provides a steady stream of income. Cash dividends are taxable as income as soon as they are received by shareholders. Here the dividend will be paid based on the number of shares held by the shareholders.
E.g. DGH Company declares a cash dividend of $0.65 per share. Shareholder B currently holds 3,200 shares in DGH, thus will receive a dividend of $2,080.
Dividend per Share (DPS) is an important investor ratio that shareholders are concerned with, that calculates the sum of dividends declared for the outstanding shares. Dividend per share is calculated as follows.
Dividend per Share = Total Dividends / Number of Outstanding Shares
Stock Dividend
Stock dividend, also referred to as ‘scrip dividend’, involves allocating additional shares to the existing shareholders based on the proportion of current shareholding. This is usually done when the company makes a loss in the current financial year, thus have no funds to be distributed as dividends, or simply because the company wishes to reinvest all the profits in the business without incurring a cash outflow.
E.g. AVC Company declares a stock dividend where shareholders will receive one additional share for every 5 shares held. Shareholder H currently holds 4000 shares in AVC, thus will receive 800 additional shares following the stock dividend.
Dividends are paid for both ordinary and preference shares, while the structure of payments often differs between the two. Preference shareholders receive dividends prior to ordinary shareholders and if they were not paid a dividend in a particular financial year, such dividends become payable by the company in an upcoming subsequent year. These types of dividends are named as ‘cumulative preference dividends’.
Figure 01: Dividend is the return for holding shares in a company
What is Dividend Yield?
Dividend yield is the financial ratio that indicates the amount of dividends that a company pays as a proportion of its share price. Dividend Yield is calculated using the below formula and is expressed as a percentage.
Dividend Yield = Dividend per Share/Price per Share* 100
There are two main types of dividend yield, namely trailing dividend yield and forward dividend yield.
Trailing Dividend Yield
Trailing dividend yield indicates a company’s actual dividend payments relative to its share price over the previous financial year. When future dividend payments are difficult to predict, trailing dividend yield becomes a stable measure of value.
Forward Dividend Yield
Forward dividend yield provides an estimate of a year’s dividend expressed as a percentage of current share prices. When future dividend payments are predictable, using forward dividend yield becomes more favorable.
A higher dividend yield indicates that the company is paying high dividends. This is often seen as a positive practice by majority shareholders. However, if a high dividend is maintained over many years, this shows that the amount of funds reinvested in the company is less. This, in turn, signals that the company does not have sufficient investment options.
What is the difference between Dividend and Dividend Yield?
Dividend vs Dividend Yield |
|
| Dividend is defined as the return paid for the ownership of shares in a company. | Dividend yield indicates the amount of dividends that a company pays as a proportion of its share price. |
| Ratio | |
| Dividend per share is calculated as (Total dividends/Number of Outstanding Shares). | Dividend yield is calculated as (Dividend per Share/Price per Share* 100). |
| Types | |
| Dividends can either be cash dividend or stock dividend. | Trailing dividend yield and forward dividend yield are two types of dividend yield. |
| Dependency | |
| The amount of dividend payable depends on the amount of net earnings made within a financial year. | Dividend yield is dependent on the amount of dividend paid and the share price. |
Summary – Dividend vs Dividend Yield
Dividend and dividend yield is based on the same concept; the difference between dividend and dividend yield is that dividend is the return paid for the ownership of shares and is calculated by the dividend per share while dividend yield indicates how much dividends is paid as a proportion of the share price. Many companies attempt to maintain stable dividends with an upward trend since majority shareholders dislike volatile dividends. However in some cases, shareholders may also claim that they prefer the company to pursue more investment opportunities, thus are willing to obtain limited dividends in certain years.
References:
1. “Dividend Per Share – DPS.” Investopedia. N.p., 16 Mar. 2008. Web. 09 Apr. 2017.
2. Ross, Sean. “What is the difference between yield and dividend?” Investopedia. N.p., 13 Jan. 2015. Web. 10 Apr. 2017.
3. “Stock Dividends vs. Cash Dividends – Boundless Open Textbook.” Boundless. Boundless, 26 May 2016. Web. 10 Apr. 2017.
Image Courtesy:
1. “Lehigh Valley Railroad Dividend Chart” By JimIrwin – Own work (CC BY-SA 3.0) via Commons Wikimedia