Difference Between Dividend Yield and Dividend Rate (With Table)

Share Market or Stock Market has always been a trending hot topic among everyone. 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. 

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 paid by the company 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 Between Dividend Yield and Dividend Rate

Parameters of ComparisonDividend YieldDividend Rate
MeaningDividend Yield can be defined as the chunk paid by a company in terms of dividend relatively to its stock price.Dividend Rate is the ratio of the dividend paid by the company annually to its relative stock price.
FormulaDividend Yield = Dividend per share/ Market value per share  Dividend Rate = Dividend Per Share/ Current Price  
ExampleThe more the company’s dividend yield, the more likely it is that 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.
FlexibilityIt is fixed and may increase or decrease.It can be fixed or adjustable depending upon 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 its 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 of 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 that they own. These dividends are usually paid by mature and well-established companies. Business development companies (BDCs), Real estate investment trusts (REITs), Master limited partnership (MLP), etc., all of them pay vast amounts of dividends, usually more than the average value, and also these companies’ dividends are taxed at higher rates. 

For example – There is a 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 company’s 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 received 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, dividend rate and dividend yield both the terms are used interchangeably. The formula of the Dividend Rate is –

Dividend Rate = Dividend Per Share/ Current Price

The dividend rate varies upon different companies. The mature company would have less likely options to invest in projects for expansions. Therefore they prefer to offer dividends to their shareholders. At the same time, a company that is establishing itself in the market would be using these dividends for investing in to expand their business rather than giving them back to their 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 lesser options for expansion in the new future.  

Main Differences Between Dividend Yield and Dividend Rate

  1. Dividend Yield is termed as the bulk amount paid by the company to their shareholders relative to their stock prices. In contrast, the Dividend Rate is the fraction of the dividend paid by the company annually to its relative current stock price.
  2. The dividend yield is observed annually while the dividend is paid quarterly or annually by the company.
  3. 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 terms, regulations, policies, and strategies of the company. 
  4. The formula for both the terms appears to be the same.
  5. Example for Dividend Yield – There is a 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 company’s 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 for every year. [it is calculated accordingly – Rs. 0.50 × 4 quarters + Rs. 0.12 (extra benefitted pay) = Rs. 2.12].

Conclusion

Dividend yield and Dividend rate are entirely different things if someone has a piece of proper knowledge about it. Both the terms are most likely to be used as interchangeable terms for each other. The dividend yield is nothing but some fraction of money a company pays as dividends relatives to its stock price. In contrast, the Dividend rate is the amount from a certain investment such as in-stock market, mutual funds, or any money market investment.

Dividend yield can be constant or increased, or decreased for a year. If there is no change in the number of dividends, then the yield would rise, and ultimately the stock price will fall, which is vice-versa.

References

  1. https://www.sciencedirect.com/science/article/abs/pii/0304405X74900063
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-6803.1993.tb00135.x