Share Market or what we call stock market always remain as a trendy topic among every people. Many people believe that investing in stock market is quite risky and more of it requires luck because the stock price rise and falls as per their own way and there is no guarantee of earning profit.
However, if a person has the right knowledge and understanding, share market can become a regular stream of income and an excellent way to earn is by investing in dividends.
When it comes to dividend, there are two major terms everyone should know i.e. dividend rate and dividend yield. Read the article given below to understand and find out the difference between both terms.
One of the best ways to understand and get a better picture of dividend rate VS dividend yield is to understand their meaning first.
Dividend Rate: Dividend rate, abbreviated as a dividend, is the total expected dividend payment a person will get from a particular instrument from a mutual fund, stock fund or any other form of market instrument.
The dividends are paid usually on a quarterly or annual basis, and based on the company’s preference and strategies while offering; they can be either fixed or adjustable.
The board of directors of the company giving a bonus determines the dividend rate, which in turn is approved by the shareholders.
The formula of Dividend Rate is
Dividend Rate = Dividend Per Share/ Current Price
The dividend rate depends on the status of the companies. The mature company would have fewer options to invest its money for expansions. Thus they offer dividends to their shareholders.
On the other hand, the company in establishing stage in the market would be using these dividends to expand their business rather than distribute it to shareholders.
The massive Rate of dividends of a company means that the company can produce cash flow from their projects and operations as they have lesser options for expansion in the future.
Dividend Yield: Dividend yield is the ratio of the dividend paid by the company annually to its relative stock price. It is generally expressed in percentage and gives an estimation of the dividend’s return on investment.
As mentioned above, the dividend rate can remain the same as the previous financial year, or it could increase or decrease. In dividend yield, the dividend amount will remain the same, and the Yield will rise when the stock price falls.
And if the stock price rise, the Yield will fall. Since the dividend yield changes with the stock price, it may seem high, especially for those stocks that are falling quickly.
The formula of dividend is
Dividend Yield = Dividend per share/ Market value per share
These dividends are paid mainly by mature and well-established companies. Business development companies (BDCs), real estate investment trusts (REITs), Master Limited partnership (MLP) etc., pay a massive amount of dividends more than the average value because their dividends are taxed at higher rates.
Let’s understand the Difference between the dividend rate and dividend with the help of the example given below:
Let’s say a person has invested RS 100000 in ABC Bank, for which he is allotted 1000 share units. Now the bank announced the dividend at Rs 10 per share, which is the dividend rate.
In this case, a person will receive a dividend amount of RS. 10,000, so your dividend yield will be calculated as below:
RS 10,000 x 1000/100000 = 10 per cent.
Book closure and ex-dividend aspects of dividend rate vs yield
While the formula mentioned above applies to all the investments held for a particular financial year, a person has to consider the yield ratio for shorter investments based on the stock’s book closure.
For example, if ABC bank’s book closure is announced on 1’st July and a person purchased shares on 1st January, he would be eligible for a 10& yield because the shareholding period consists of six months compared to a year.
Apart from the book closure, a person must also consider the ex-dividend aspect, which is the date after which a person will not be eligible to receive dividends in a given financial year.
Thus, if XYZ bank announces 25th July as book closure, the stock exchange may announce 20th July as the ex-dividend rate, after which a person will not be entitled to receive dividends from the company.
The formula of dividend yield is; Dividend Yield = Dividend per share/ Market value per share
Dividend rate, abbreviated as a dividend, is the total expected dividend payment a person will get from a particular instrument from a mutual fund, stock fund or any other form of market instrument.
Dividend yield is the ratio of the dividend paid by the company annually to its relative stock price. It is generally expressed in percentage and gives an estimation of the dividend’s return on investment.
Final Thoughts
Dividend yield and dividend rate are both different things. However, both sounds the same, but they are most likely to be used as interchangeable terms for each other.
The dividend rate is the amount obtained from a particular investment such as mutual funds, stock market or any other market instruments.
Whereas the dividend yield is nothing but some money, a company pays as dividends relatives to its stock price.
The dividend yield can be increased, decreased, or remain constant for a year. If there is no fluctuation in the number of dividends, the yield will rise, and the stock price will fall ultimately, whereas if the yield would fall, the stock price will increase and vice-versa.