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Dividend yield

Companies usually declare dividens as a percentage on nominal value of shares. This value may be far removed from market value. A company which has been in business over an extended period will, if only because of inflation, find that the current listed market price of its shares is usually well above the price at which they were originally issued whether this was at the nominal value or at that value plus a premium. This ratio of the dividend to the current market price is referred to as the dividend yield.

There is nothing particularly significant in the fact that a dividend of, say, 60 per cent is declared. This percentage should be related not to the initial nominal value but to the total equity capital, i.e. share capital plus eserves. Again, it will appear in quite a different light when the dividend is expressed as a percentage of the present market value of the shares at the time the dividend was declared. In an expanding company, 60 per cent may well represent no more than 6 per cent on the current price of the share.

Where fixed interest securities are concerned, much the same pattern emerges except that here, because the dividend does not vary and consists of the total share of earnings that can be claimed, both earnings yield and dividend yield will tend to converge – provided the fixed dividend has been regularly paid. The yield figure will then tend to follow the prevailing fixed interest rate and reflect less the state of the company than the state of the economy. However, the yields on preference shares are necessarily always affected by the knowledge that the capital itself is more at risk than with, say, a government bond; therefore although yields on fixed dividend shares and other risk capital, like interest rates generally, are a measure of public confidence in the state of the econ)my, they will usually be slightly higher than that on non-risk securities such as consols. One other factor that will also affect the yield occurs when the shares, or other capital concerned, is in the nature of redemption capital, i.e. the capital sum is to be repaid at a future date.

Reference: The Penguin Business Dictionary, 3rd edt.