It is no hidden secret that the stock market is a great place to build a corpus. Conservative, prudent investments can help you create wealth gradually. Many people invest in this market, not only to create a corpus but also to ensure that they can have a steady source of income. An excellent way to ensure that you can create a regular and steady income stream is to invest in companies offering dividends. However, most people are confused about the difference between dividend rate and dividend yield. Read on to find out the difference between the two terms.
Dividend rate vs dividend yield – the differences
The best way to understand the difference between dividend rate and yield is to start with their definitions. They are as under:
Dividend rate: Dividend rate, often plainly referred to as dividend, is essentially the total expected dividend payment that you can get form a specific investment, which could be a stock, a mutual fund or another such money market instrument. Dividends are typically paid either quarterly or on an annual basis. The dividend rate could be fixed or adjustable, and it generally depends on the preferences and strategies followed by the company offering the dividend. The board of directors of the company offering this bonus determines the dividend rate, which is then approved by shareholders.
Dividend yield: Dividend yield is simply the financial ratio that demonstrates how much a particular company is paying in dividends, each year about its stock price. The dividend yield is generally expressed in percentage and represents an estimation of the dividend-specific return of an investment. As mentioned above the dividend rate can either remain the same as the previous financial year, or it could increase or decrease. In case the dividend amount remains unchanged, the yield will rise when the stock price falls. Conversely, the yield will fall in case the stock price rises. Since the dividend yield changes with the stock price, it may often appear unusually high, especially for those stocks, which are falling quickly.
Example to help understand the difference between dividend rate and dividend yield
Let’s say you invest Rs.100,000 in XYZ Bank, for which you are allotted 1000 share units. Now, the bank declares dividends of Rs.5 per share, which is the dividend rate. In such a situation, you will receive a total dividend amount of Rs.5,000. In this situation, your dividend yield can be calculated as below:
Rs.5,000 x 100/100000 = 5 per cent
Book closure and ex-dividend aspects of dividend rate vs yield
While the formula mentioned above applies to investments held for an entire financial year, you have to consider the yield ratio for shorter investments, based on the stock’s book closure. For instance, if XYZ Bank’s book closure is on 1st July, and you purchased your shares on 1st January, you would be eligible for a 10% yield, since the shareholding period is only six months, as opposed to a year.
Apart from the book closure, it would help if you also considered the ex-dividend aspect, which is the date after which you 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 declare 20th July as the ex-dividend date, after which you will stop receiving dividends from the company.
As is evident, the difference between dividend rate and yield is quite simple to understand. If you need any guidance for your investments, you can contact the Angel Broking team.