Dividend Yield – a sound indicator to select stocks for investment

Experts generally agree that dividend yield is a relatively good guide when selecting stocks for investment.

What is dividend yield?

Dividend yield is a good indicator of a company’s financial strength and measures how much cash flow you are getting for each ringgit invested in a stock. To an investor, it indicates how much you are getting from your investment.

Dividend Yield: Annual Dividend per Share / Price per Share

To better explain this concept, let’s look at an example:

Let’s assume Stock A and Stock B both pay annual dividends of RM1 per share. However, Stock A is trading at RM10 while Stock B is trading at RM20.

Dividend Yield for Stock A = 1/10 or 10%

Dividend Yield for Stock B = 1/20 or 5%

All factors being equal, an investor would probably choose Stock A as the dividend yield measures the “productivity” of an investment.

The dividend yield can be a sign of a company’s stability as it is normally a profitable company that will pay out dividends.

Thus, companies that have paid out significant dividends for an extended period of time are more attractive to an investor.

Source: http://www.investopedia.com/terms/d/dividendyield.asp accessed on 17 July 2014