What is the dividend yield and divident payout ratio and how are they related?

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justaguide eNotes educator| Certified Educator

The dividend payout ratio of a firm is the fraction of the income earned during a period of time that is distributed to the share holders as dividends. For example if a firm that has earned $10 million in a year decides to give $1 million as dividends to its shareholders the dividend payout ratio would be 10%. Most companies that can invest the income earned to expand their present operations or start other more profitable projects do not pay dividends. In this case the returns on the investment of shareholders is in the form of an appreciation in the value of the stock they own.

Dividend yield on a stock varies for each share holder and is dependent on the prevailing market value of the share when it is bought. The dividend yield is the dividend paid in the year that the share was held for divided by the price of the share when it was bought. The dividend yield can be expressed as the product of the earnings per share and the dividend payout ratio divided by the market price of the share.