Gross Dividend Yield

Gross Dividend Yield Dividend Income Stock Market Investment Yield Financial Metrics Income Investing
Gross dividend yield represents the annual dividend income received from a security as a percentage of its current market price before the deduction of any taxes or charges.
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Definition

Gross Dividend Yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is expressed as a percentage and represents the return on investment for shareholders through dividends. Unlike net dividend yield, the gross figure does not account for the taxes or charges that investors may incur.

Formula

The formula for calculating gross dividend yield is:

\[ \text{Gross Dividend Yield} = \frac{\text{Annual Dividends per Share}}{\text{Current Market Price per Share}} \times 100 \]

Examples

  1. Example 1:

    • A company pays an annual dividend of $5 per share.
    • The current market price per share is $100.
    • Gross Dividend Yield = (5 / 100) * 100 = 5%

  2. Example 2:

    • A company’s annual dividend per share is $3.
    • The current share price is $50.
    • Gross Dividend Yield = (3 / 50) * 100 = 6%

Frequently Asked Questions

Q: How is gross dividend yield different from net dividend yield? A: Gross dividend yield is calculated before any taxes or fees are deducted, whereas net dividend yield takes into account the taxes and fees that an investor must pay on dividend income.

Q: Why is gross dividend yield important? A: Gross dividend yield is important for investors seeking income through dividends, as it gives an indication of the potential return on investment excluding any deductions.

Q: Can gross dividend yield change over time? A: Yes, gross dividend yield can fluctuate with changes in the company’s dividend payments and its stock price.

  1. Dividend

    • A dividend is a payment made by a corporation to its shareholders, usually in the form of a distribution of profits.

  2. Net Dividend Yield

    • Represents the annual dividend income received from a security as a percentage of its current market price after the deduction of any taxes or charges.

  3. Earnings Per Share (EPS)

    • A financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock.

  4. Dividend Payout Ratio

    • A financial ratio that measures the percentage of earnings a company pays out as dividends to shareholders.

Online References

Suggested Books for Further Studies

  • “The Little Book of Common Sense Investing” by John C. Bogle
  • “Dividends Still Don’t Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market” by Kelley Wright
  • “The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor” by Josh Peters

Accounting Basics: “Gross Dividend Yield” Fundamentals Quiz

### What does the Gross Dividend Yield represent? - [ ] The total dividends paid by a company. - [x] The annual dividend income received as a percentage of its current market price. - [ ] After-tax income from dividends. - [ ] The stock price of a company. > **Explanation:** Gross Dividend Yield represents the annual dividend income received from a security as a percentage of its current market price before deductions. ### How is Gross Dividend Yield calculated? - [x] Annual Dividends per Share divided by Current Market Price per Share. - [ ] Market Price per Share divided by Annual Dividends per Share. - [ ] Annual Dividends multiplied by the Market Price per Share. - [ ] Market Price per Share divided by Dividend Payout Ratio. > **Explanation:** Gross Dividend Yield is calculated by dividing the Annual Dividends per Share by the Current Market Price per Share. ### Does Gross Dividend Yield account for taxes or charges? - [ ] Yes, it includes taxes and charges. - [x] No, it does not account for taxes or charges. - [ ] It accounts only for charges. - [ ] It accounts for state taxes only. > **Explanation:** Gross Dividend Yield does not account for taxes or charges, unlike net dividend yield which does. ### Which statement is true regarding Gross Dividend Yield? - [ ] Higher dividends lead to a lower gross dividend yield. - [x] Changes in stock price affect the gross dividend yield. - [ ] Gross dividend yield is constant over time. - [ ] It accounts for personal income tax impacts. > **Explanation:** Changes in the stock price directly impact the gross dividend yield; higher stock prices can reduce yield and vice versa. ### Is Gross Dividend Yield important for income-seeking investors? - [x] Yes, it indicates potential returns excluding deductions. - [ ] No, they should only be concerned with net dividend yield. - [ ] No, they should focus on earnings per share. - [ ] Yes, but it is less important than stock price growth. > **Explanation:** Gross dividend yield is a crucial metric for income-seeking investors as it gives a preliminary idea of the returns through dividends without considering deductions. ### What needs to fluctuate for gross dividend yield to change? - [ ] Amount of taxes. - [ ] Number of outstanding shares. - [x] Stock price or dividend amount. - [ ] Book value of the company. > **Explanation:** Gross dividend yield changes with fluctuations in the stock price or the amount of dividend paid by the company. ### Can gross dividend yield be higher than the stock return? - [ ] Yes, always. - [ ] No, never. - [x] Yes, particularly if the stock price falls. - [ ] No, dividends are part of the stock return. > **Explanation:** If the stock price falls and the dividend remains unchanged or increases, the gross dividend yield can be higher than the stock return. ### Which formula correctly represents Gross Dividend Yield? - [ ] \\((\text{Current Market Price} / \text{Annual Dividends}) \times 100\\) - [ ] \\((\text{Annual Dividends} \times \text{Dividend Payout Ratio})\\) - [x] \\((\text{Annual Dividends per Share} / \text{Current Market Price per Share}) \times 100\\) - [ ] \\((\text{Net Income} / \text{Total Shareholder Equity}) \times 100\\) > **Explanation:** Gross Dividend Yield is given by \\((\text{Annual Dividends per Share} / \text{Current Market Price per Share}) \times 100\\). ### What essential investor detail does Gross Dividend Yield omit? - [ ] Amount of dividends received. - [ ] Performance of the market. - [ ] Type of investment. - [x] Taxes and fees. > **Explanation:** Gross dividend yield omits taxes and fees that an investor must pay on the dividend income. ### Does a higher gross dividend yield always indicate a better investment? - [ ] Yes, it guarantees more income. - [x] No, it requires assessing company stability. - [ ] Yes, regardless of company performance. - [ ] No, dividends are irrelevant for investment. > **Explanation:** A higher gross dividend yield does not always mean a better investment. Investors must also consider the stability and overall financial health of the company.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!

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Tuesday, August 6, 2024
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