Share Market or Stock Market has always been a trending hot topic. It is always said that investment in the stock market is risky and totally upon someone’s luck.
It rapidly rises and falls at the same pace and does not provide any guarantee. Various Multi-National Companies or large organizations invest their money in these share markets and take valuable profits from them.
Key Takeaways
- The dividend yield is the percentage of return on investment based on the current stock price, while the dividend rate is the dividend paid per stock share.
- Dividend yield varies with the stock price and reflects the return on investment, while the dividend rate remains constant for a specific period.
- The dividend yield is used to compare different stocks, while the dividend rate calculates the income generated from the investment in a particular stock.
Dividend Yield vs Dividend Rate
The difference between the Dividend Yield and Dividend Rate is that Dividend Yield is the sum of money that a company has to pay in dividends each year relative to its stock price. In contrast, the Dividend Rate is the ratio of the dividend the company pays annually to its relative stock price.
Dividend Yield is expressed in percentage, and the formula for calculating dividend yield is (Dividend per share /Market value per share). The dividend ratio/price is the reciprocal of the dividend yield.
Dividends are paid mainly by mature companies. Real estate investment trusts, business development companies, etc., are used to pay higher dividend values than average.
The Dividend Rate is also be expressed in percentages. The dividend rate of a company can be fixed or flexible and may be changed with the company’s strategies and preferences.
These are paid by the companies having a great and healthy profit. It is a way to assess a company’s sustainability.
Comparison Table
| Parameters of Comparison | Dividend Yield | Dividend Rate |
|---|---|---|
| Meaning | The dividend Rate is the ratio of the company’s annual dividend to its relative stock price. | The dividend Rate is the ratio of the dividend the company pays annually to its relative stock price. |
| Formula | Dividend Yield = Dividend per share/ Market value per share | Dividend Rate = Dividend Per Share/ Current Price |
| Example | The more the company’s dividend yields, the more likely people will invest in it. | An investment pays a dividend of about Rs. 0.50 quarterly with an extra Rs. 0. 12 because of some events which benefitted the company. The dividend rate calculated is Rs. 2.12 per year. |
| Flexibility | It is fixed and may increase or decrease. | It can be fixed or adjustable depending on the company’s policies and strategies. |
| When to be paid? | It is paid annually. | It is paid quarterly or annually. |
What is Dividend Yield?
Dividend Yield can be defined as the money paid by the company in terms of dividend relative to the market value of the shares. It can be expressed in percentages. The formula of dividend yield is –
Dividend Yield = Dividend per share/ Market value per share
The reciprocal dividend yield is Market value per share/ Dividend per share.
By the above formulas, it can also be said that dividend yield is the sum of money paid by various companies to their stockholders/ the current price of the stock they own.
Mature and well-established companies pay these dividends. Business development companies (BDCs), Real estate investment trusts (REITs), Master limited partnerships (MLP), etc., all of them pay vast amounts of dividends,
usually, more than the average value, these companies’ dividends are taxed at higher rates.
For example – Company X and its stock price is trading at $40; now, the company pays $1 to their stockholders. Relatively, another Company, Y, its stock is trading at $80, and they also pay $1 to their stockholder.
Therefore, the dividend yield of Company X is 2.5% ($1/$40), whereas the dividend yield of Company Y is 1.25%. And if all the other factors are assumed to be equal, any investor will choose Company X to invest its income because they double its dividend yield.
What is Dividend Rate?
The dividend rate is the expected amount of money an investor receives after an annual year in a company. The dividend rate of a company can be fixed or flexible and may be changed with the company’s strategies and preferences.
These are paid by the companies having a great and healthy profit. It is a way to assess a company’s sustainability. Sometimes, the terms dividend rate and dividend yield are used interchangeably.
The formula of the Dividend Rate is –
Dividend Rate = Dividend Per Share/ Current Price
The dividend rate varies for different companies. The mature company would have fewer likely options to invest in expansion projects.
Therefore they prefer to offer dividends to their shareholders. At the same time, a company establishing itself in the market would use these dividends to expand its business rather than give them back to its shareholders.
The huge rates of dividends of a company mention that the company can produce cash flow from their projects and operations; also, they have fewer options for expansion in the future.
Main Differences Between Dividend Yield and Dividend Rate
- Dividend Yield is termed as the bulk amount paid by the company to its shareholders relative to their stock prices. In contrast, the Dividend Rate is the fraction of the dividend the company pays annually to its relative current stock price.
- The dividend yield is observed annually, while the company pays the dividend quarterly or annually.
- Dividend yield can be the same or increased or decreased for a year, while the dividend rate could be adjustable or fixed; it depends upon the company’s terms, regulations, policies, and strategies.
- The formula for both terms appears to be the same.
- Example for Dividend Yield – There is Company X, and the price of its stock is trading at $40. Now the company pays $1 to their stockholders. Relatively, another Company, Y, its stock is trading at $80, and they also pay $1 to their stockholder. Therefore, the dividend yield of Company X is 2.5% ($1/$40), whereas the dividend yield of Company Y is 1.25%. And if all the other factors are assumed to be equal, any investor will choose Company X to invest its income because they double its dividend yield.
Example for Dividend Rate – If an investment pays a dividend of about Rs. 0.50 quarterly but also pays you an extra Rs. 0. 12 because of some events which benefitted the company. Then the dividend rate to be calculated is Rs. 2.12 every year. [it is calculated accordingly – Rs. 0.50 × 4 quarters + Rs. 0.12 (extra benefitted pay) = Rs. 2.12].
- https://www.sciencedirect.com/science/article/abs/pii/0304405X74900063
- https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-6803.1993.tb00135.x
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