InvestorQ : How does an investor use dividend yields effectively to decide on stocks?
Nikita Damle made post

How does an investor use dividend yields effectively to decide on stocks?

Answer
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Dilmini Mercia answered.
2 years ago


It is the ratio of the dividend paid out to the price of the stock. Normally, this ratio does not get due importance as it only captures the dividend aspect of returns and ignores the capital appreciation aspect. But it is still an important indicator. Firstly, in case of market wide dividend yield, the market overpricing and under-pricing can be more clearly defined using dividend yield. For example a dividend yield below 1 is normally a sign of an overheated market while a dividend yield above 3 is a sign of an under-priced market. These levels are more clearly respected than the levels for P/E and P/BV which tend to be vulnerable to speculative excesses. Similarly, at a stock specific level the dividend yield underscores the cushion or the margin of safety in case of high dividend yield stocks. For example stocks like Cairn India, NMDC, Vedanta and Coal India offer a margin of safety due to attractive dividend yield in the range of 5-9%.