The stock exchange is a great spot to create a corpus. You can build wealth slowly by making prudent, conservative investments. This market is popular because it allows people to build a wealth and also provides steady income. A dividend-paying company is a great way to create steady income streams. Most people don't understand the difference between dividend yield and dividend rate. Learn more about the differences between these terms.
It is important to know the differences between yield and dividend rate. These definitions are:
Dividend Rate: The expected dividend rate from a particular investment (e.g., stock, mutual fund, or other money market instrument) is often simply referred to by the term dividend. Dividends are usually paid quarterly or annually. The company that offers the dividend could set a fixed or adjustable dividend rate. It also depends on their strategies and preferences. The dividend rate is set by the board of directors at the bonus company. Shareholders then approve it.
Dividend Yield: The financial ratio that shows how much dividends a company pays each year relative to its stock price is the Dividend Yield. The dividend yield, which is usually expressed in percentage, represents the investment's dividend-specific return. The dividend rate could be the same as in the previous year or increase or decrease. If the dividend amount is not changed, the yield will increase if the stock price falls. In the opposite case, the yield will decrease if the stock price increases. The stock price changes and the dividend yield can appear high for stocks that are rapidly falling.
Let's suppose you have invested Rs.100,000. You are given 1000 shares units. The bank will now declare dividends at Rs.5 per share. This is the dividend rate. In this situation, your total dividend amount will be Rs.5,000. This is how your dividend yield will be calculated:
Rs.5,000 x 100/100000 = 5 per cent
The formula above is applicable to investments that are held for a full financial year. However, the yield ratio for shorter investments based on stock's closing date must be considered. If XYZ Bank's books close on July 1, and your shares were purchased on January 1, you will be eligible for a 10% return, because the shareholding period is six months rather than a year.
It is important to consider the ex-dividend element. This is the date you are no longer eligible for dividends after a financial year. If XYZ Bank announces 25 th Jul as book closing, the stock exchange could declare 20 th Jul as the ex-dividend day, which is the date after which you will cease receiving dividends from them.
It is easy to see that the difference between yield and dividend rate is very simple.