Metric Explainer: Dividend Yield
How much dividend income you get for every ₹100 invested in the stock at the current market price. "Dividend Yield batata hai ki aapne jo share kharida, uspe...
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Simple definition
How much dividend income you get for every ₹100 invested in the stock at the current market price.
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"Dividend Yield batata hai ki aapne jo share kharida, uspe har saal kitna dividend milega. 3% yield = ₹100 invest kiya toh ₹3 dividend milega."
Why it matters
- Income generation — retirees and income investors focus on yield
- Floor valuation — stocks with high reliable yields have limited downside
- Total return — dividend yield + capital appreciation = total shareholder return
- Contrast with bonds — compare with FD/bond yields (6–8%) to assess attractiveness
Formula
Dividend Yield = (Annual Dividend Per Share / Current Market Price) × 100
How to classify
| Dividend Yield | Classification | Typical stocks |
|---|---|---|
| 0% | No dividend | Growth companies, loss-makers |
| 0.5–1.5% | Token dividend | Most growth companies (TCS, Infosys) |
| 1.5–3% | Moderate | Large-cap bluechips |
| 3–5% | High yield | Coal India, PSU banks, Power Grid |
| > 5% | Very high | Either great value or price has crashed |
Sector context
| Sector | Typical yield | Why |
|---|---|---|
| PSU (Power, Mining, Oil) | 3–8% | Government mandates dividend payouts |
| IT Services | 1–3% | High FCF but also do buybacks |
| FMCG | 1–2% | Stable but premium-priced (yield optically low) |
| Banking (Private) | 0.5–1% | Retain capital for growth |
| New-age tech | 0% | Not yet profitable or retaining for growth |
The dividend yield trap
High yield may be a trap
Dividend yield rises when the stock price falls. A stock at ₹100 paying ₹5 dividend = 5% yield. If the price crashes to ₹50, yield becomes 10% — but the business may be deteriorating.
Always check:
- Is the dividend sustainable? (Check payout ratio and FCF)
- Did the yield become high because the price crashed?
- Has the company maintained or grown dividends over 5+ years?
Dividend yield vs FD
| Factor | Dividend yield | FD interest |
|---|---|---|
| Return certainty | Not guaranteed | Guaranteed |
| Capital appreciation | Yes (stock price can grow) | No |
| Tax | 0% on dividends up to ₹10L (old regime) / slab rate | Slab rate |
| Inflation hedge | Dividends can grow with profits | Fixed return, eroded by inflation |
Common mistakes
Mistakes to avoid
- Chasing high yield alone — a 10% yield from a declining business is worse than 2% from a growing one
- Not checking if dividend is special (one-time) — special dividends inflate yield temporarily
- Ignoring buybacks — TCS/Infosys distribute via buybacks too; yield alone understates total return
- Comparing yield across sectors — PSU yields are always higher due to government policy
Red flags
- Yield > 8% in a non-PSU stock — investigate why price has fallen so much
- Dividend cut or skip after years of paying — potential financial stress
- Dividend paid despite negative FCF — funded by debt or reserves, unsustainable
- Dividend declining year-over-year in a flat/growing market — business deterioration
Related metrics
- Dividend Payout — What % of profit is paid as dividends
- FCF — Dividends should be backed by free cash flow
- PE Ratio — Growth investors use PE; income investors use yield