Definition: A ratio showing how much a company pays in dividends each year relative to its share price. Assuming that the stock price does not change, the dividend yield is the only return on the stock holder’s investment.
Dividend Yield = Annual dividends per share / Price per share
Example: Dividend yield is a way to measure how much “bang for your buck” you are getting from your investment through dividends.
To better explain dividend yield, lets explore an example. If two companies pay the same annual dividends of $1 per share per year, but XYZ company’s stock sells at $20 while ABC company’s stock sells at $40, then XYZ has a dividend yield of 5% while ABC is only yielding 2.5%. Assuming that all other factors are the same, an investor that is looking to add to his or her income would likely prefer XYZ’s stock over that of ABC’s stock.