Dividend Yield Calculations

May 5th 2009
Tags: Dividend Guies

Dividend

Companies declare dividends as a percentage of the face value of their shares, which may range from Re 1 to Rs 10. So a 100 per cent dividend on a Re 1 share is only worth Rs 10 a share.Not all companies give away a chunk of their hard-earned profits to its investors.

Calculated as the ratio of the annual dividend amount announced and the prevailing market price of the company’s share, the dividend yield ratio shows what investors stand to earn on their shares.

For example, information technology majors Infosys Technologies and Wipro recently declared their annual dividends, of 270 per cent and 200 per cent respectively. But do not go by the mere percentage of dividend announcement since dividends are paid at face value of the stock.

That is, for Infosys (face value of Rs 5) the dividend per share is Rs 13.50, whereas for Wipro (face value Rs 2) it is Rs 4.

However, the dividend yield will be higher for Wipro (1.2 per cent) as its current market price is lower than that of Infosys (0.8 per cent).

While sifting through high dividend stocks, you will also notice that the companies with high promoter holding declare dividends periodically. Apart from public sector companies, others such as Tata Consultancy Services, Sterlite Industries, Reliance Industries, Wipro and HCL, where promoter holdings are 49-75 per cent, declare dividends regularly.

For companies such as Maruti Suzuki and UltraTech Cements, which recently made public their final dividends for the year, the dividend coverage stands at 12-15 times.

This means that these companies’ profits are 12-15 times the amount of dividends declared.

A higher dividend ratio indicates that the company is not straining itself to give away dividends .

Companies such as Hero Honda, Nestle India, Colgate Palmolive and Indraprastha Gas which have minimal debt on their balance-sheets also give away substantial sums as dividends. Final dividends are also a function of the future cash requirements of the company.