Dividend Yield : How relevant is it to Investors?

Dividend yield is the percentage of dividend received against its purchase price. For instance if you bought 100 shares of a company for Rs.50000 and got Rs.1000 as dividend, then the dividend yield is Rs.1000/Rs.50000 * 100 = 2%.

For investors who get 8% out of Bank deposits, this 2% looks peanuts. Hence investors in stock market 'usually' ignore the dividend received. And the saddest part is many do not even keep track of the dividends received. They invest mainly for the capital appreciation in the stock market. This loosely results in speculating in the stock market.

The basic assumption while investing in a stock is : the stock will grow over a period of time. If that is true, then the profits will grow with time and  logically the dividend also will grow with it.

Let's understand it with an example

• TCS got listed in August 2004 at Rs.850 per share
• In March 2005 TCS declared a dividend of Rs.11.50 per share. The Div Yield works out to 1.35%. Definitely not an attractive yield.
• In 2006 they issued a 1:1 Bonus
• Again in June 2009 another 1:1 Bonus was issued
• If an investor bought 1 share of TCS @ Rs.850. Now he would be having 4 shares. Hence the average cost works out to Rs.212.50
• In 2015, TCS has declared a dividend of Rs.79 per share (including a special dividend of Rs.40).
• Rs.79 dividend received on an investment of Rs.212.50 works out to Rs. 37,17%
• Even if you remove the special dividend, Rs.39 works out to a Div Yield of 18.35% which is far more than your 8% Bank FD yield.
• The dividend per share (adjusted for bonus) has grown from Rs.3.38 in 2005 to Rs.79 in the last 10 years. That's a 23.4 times increase !
• And the Earnings per share has grown from Rs.15.16 in FY 2006 to Rs.101.35 in FY 2015.
• This dividend is apart from the current market value of Rs.2397 (as on 13th Nov 2015).
• So your initial investment of Rs.850 has grown to Rs.Rs.2397, apart from a yearly dividend of 18% to 35%.

The beauty is even TCS shareholders would not have realised that their investment has done so well over the years. But the patience has paid off.

Hence it makes sense to invest in a stock which has good growth potential and stay invested for the long term. The key message is : What matters is Quality and not Quantity in Stock Market. Even at a premium you need to invest in good quality company which will grow into future.