Dividend is the distribution of profit among the shareholders. Dividend Yield (DY) is the ratio of annual dividend received and the current price per share. It is a financial ratio which shows the amount of cash flow received for each dollar invested in the stock and is expressed in percentage.
For example, a company XYZ declares a dividend of $1 and the current market price of a share is $50. Therefore dividend yield of the XYZ is calculated asDividend Yield (DY) = ($1/$50)*100 = 2%
Dividend yield is the one of the factors which is considered before investing in a particular stock. Usually a stock with high dividend yield is preferred. For investors looking for minimum stream of income can invest in a stock with high and stable dividend yield.
For example, Company A and Company B each declares $1 as dividend. Supposing the stock market price of A is $20 and B is $40, the dividend yield of A is 5% and B is 2.5%. One would therefore invest in A as the dividend yield is higher, all other factors remaining the same.