Definition of Dividend
To understand dividend yield, first of all we need to understand the meaning of dividend. Dividend is the part of profit of a company which is distributed among its shareholders. However, as compared to capital gains, dividend does not provide any guarantee of regular and high returns to the shareholder.
Generally, dividend is paid on annual basis but there is no hard and fast rule for its payment. Thus it can be paid on quarterly or half yearly basis. Company pays dividend to its shareholder according to its convenience. There are two types of dividend. It can be paid in the form of cash or it can be paid by issuing bonus shares to shareholders.
Definition of Dividend yield
As far as dividend yield is concerned, it is a kind of financial ratio. This helps us to understand that in what ratio company is paying dividend for market value of the shares. In other words, it helps in knowing the
Ratio of market value of shares: dividend paid by company
Comparison of dividend yield of two companies helps us in knowing that which company is paying higher dividend. The benefit of dividend yield is that we can analyze that whether any other company is paying higher dividend than your company and if it is of, then what is the reason behind it. Many mutual funds also work on the basis of dividend yield.
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