Dividend yield
Dividend per share divided by the share's market price — the cash income a share pays relative to what it costs today. It falls as prices rise and rises as they fall.
In plain language
A company declares a dividend. What that dividend is worth to you depends on what you paid for the share.
Dividend yield puts the two together: the rupees of dividend per share, divided by the market price. A share paying Rs 4 and trading at Rs 200 yields 2 per cent — the same way a bond's current yield compares its coupon with its price.
How it works
The workbook's calculation (section 2.12.1). A 40 per cent dividend on a face value of Rs 10 is Rs 4 per share; with the share at Rs 200, the dividend yield is 4 ÷ 200 = 2 per cent.
Price and yield move in opposite directions. Because the dividend is fixed once declared, a rising share price pushes the yield down and a falling price pushes it up.
What it is used for:
- Income investors seek companies with a history of growing, consistent dividends. The workbook notes that public sector units, especially PSU banks, tend to have higher dividend yields in India.
- Reading the market cycle. A bull market is marked by falling dividend yields as prices rise; a bear market by higher and increasing yields as prices fall.
- Mutual fund category. Chapter 5 describes a Dividend Yield Fund as an open-ended equity scheme investing predominantly in dividend-yielding stocks, with at least 80 per cent in equity.
It sits alongside the P/E multiple and price to book value as one of the commonly used terms in equity investing.
The formula
Dividend per share = Dividend rate (% of face value) × Face value
Dividend yield = Dividend per share ÷ Market price per share × 100
A worked example
The face value step. Two companies each declare a "40 per cent dividend":
| Company P | Company Q | |
|---|---|---|
| Face value | Rs 10 | Rs 2 |
| Dividend per share | Rs 4.00 | Re 0.80 |
| Market price | Rs 200 | Rs 40 |
| Dividend yield | 2.0% | 2.0% |
The same "40 per cent" means five times as many rupees for P — yet the yields are identical, because the prices differ in the same proportion.
Price moves, illustrative. A PSU bank pays Rs 12 a share:
| Share price | Dividend yield | Market mood |
|---|---|---|
| Rs 300 | 4.0% | Bearish — prices down, yield up |
| Rs 400 | 3.0% | |
| Rs 600 | 2.0% | Bullish — prices up, yield down |
An investor buying at Rs 300 locks in twice the income per rupee invested of one buying at Rs 600, on the very same dividend.
Why NISM asks about it
Chapter 2 (Securities: Types, Features and Concepts of Asset Allocation and Investing), section 2.12.1, with the Rs 4 / Rs 200 worked example; Chapter 5 (Mutual Funds) for the dividend yield fund category. Expect the calculation, the inverse relationship with price, and its use as a market-cycle indicator.
Common exam traps
- Divide by market price, not face value. Dividend ÷ face value just gives back the "40 per cent" declared rate.
- Convert a percentage dividend into rupees first — 40 per cent of a Rs 2 face value is 80 paise, not Rs 4.
- Bull markets have falling dividend yields; bear markets rising ones.
- A high yield is not automatically a bargain — it may simply reflect a falling price.
- How dividends are announced today. The workbook describes a dividend "declared as a percentage of the face value". Listed companies are now required by SEBI's listing regulations to declare and disclose dividends on a per-share basis in rupees, which removes the face value step in practice — but the exam can still hand you a percentage.
Check yourself
1.A company declares a 40% dividend on its shares of ₹10 face value. The share trades in the market at ₹200. What is the dividend yield?
- a)40%
- b)20%
- c)4%
- d)2%
Show the answer
Answer: (d) 2%
Two steps, and the whole question is about not skipping the first.
Step 1: the dividend is declared as a percentage of face value, so the rupee dividend is 40% × ₹10 = ₹4 per share.
Step 2: dividend yield = dividend per share ÷ market price = 4 ÷ 200 × 100 = 2%.
Why the wrong options tempt: 40% is the announced figure, which feels like the answer but is measured against ₹10, not against the ₹200 you paid. 20% comes from dividing 40 by 200 without converting to rupees first. 4% confuses the rupee dividend (₹4) with a percentage.
The direction matters too: dividend yield is inversely related to price, which is why a bull market shows falling dividend yields and a bear market rising ones.
2.A Focused Fund may invest in a maximum of how many stocks, and what is its minimum equity allocation?
- a)20 stocks; 65 percent
- b)30 stocks; 80 percent
- c)30 stocks; 65 percent
- d)50 stocks; 80 percent
Show the answer
Answer: (b) 30 stocks; 80 percent
Focused Fund: An open ended equity scheme investing in maximum 30 stocks... Minimum investment in equity & equity related instruments shall be 80 percent of total assets.
There is a further disclosure requirement: the scheme needs to mention where it intends to focus, viz. multi cap, large cap, mid cap, small cap. A focused fund of 30 small caps and a focused fund of 30 large caps are very different propositions, so the investor is told which it is.
Compare the neighbouring categories, which also sit at 80 percent minimum equity: Dividend Yield Fund, Value or Contra Fund, Sectoral/Thematic, ELSS and Large Cap Fund (the last being 80 percent specifically in large cap companies).
Where this is taught
Free preparation for NISM Series II-ARelated terms
- Current yieldA bond's annual coupon in rupees divided by its current market price — the cash income the bond throws off this year, ignoring any gain or loss at redemption.
- Dividend Payout RatioDividend per share divided by earnings per share — the share of profit a company hands to shareholders rather than ploughing back into the business.
- Earnings yieldEarnings per share divided by the current market price — the reciprocal of the P/E ratio, expressed as a percentage so that equity can be set directly against a bond yield.
- Face valueThe denomination a company's capital is divided into and carried in its books — fixed, printed on the certificate, and the base on which dividend percentages and stock splits are computed.
- Price to Book ValueShare price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
- Differential Voting RightsEquity shares that carry less than one vote each, letting a company raise capital without diluting control — and letting an investor who does not want the vote buy the same economics at a discount.
- Corporate actionAn event initiated by a company that changes the securities it has issued — dividend, buyback, bonus, split, consolidation, rights issue or merger — and which the registrar has to execute investor by investor.