Friday 1 December 2006

A Word a Day: "Dividend Yield"

A numerical measure that relates dividends to the current share price and puts ordinary dividends on a relative (percentage) rather than an absolute (dollar) basis. This makes it easier to compare the yields of different stocks.

The average dividend yield of the whole market (or a particular segment) is often compared to the typical (long-run) average dividend yield in order to determine if the market (or segment) is over-priced, fair value, or under-priced.

This is only an approximation however, because the dividend yield calculation is based on historic dividends and the current share price to try to predict the future. Some analysts will modify this measure to make use of estimated or "prospective" earnings to decide if current prices are fair value. Of course this is only as accurate as your estimation of prospective earnings.

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