What is dividend yield?

Dividend yield measures the cash income a stock pays relative to its price. It is calculated as:

Dividend yield = annual dividend per share ÷ current share price × 100.

If a company pays Rs 8 in dividends per share over a year and the stock trades at Rs 100, the dividend yield is 8%. It tells you, roughly, the income return you would earn from dividends alone if you bought the share today and the payout stayed the same.

Yield is especially important to income-focused investors — people who want their portfolio to generate regular cash, such as retirees. On the PSX, mature, cash-generative companies in banking, fertiliser, and energy often offer attractive yields, which is part of their appeal as blue chips.

Because price sits in the denominator, yield moves inversely with the share price. If the dividend is unchanged but the stock falls, the yield rises; if the stock rallies, the yield falls. This produces a subtle insight: a high yield can mean a genuinely generous payer or a stock that has dropped sharply because the market fears the dividend is at risk. A very high yield is therefore sometimes a warning sign rather than a bargain — a "yield trap" — if the dividend is about to be cut.

To judge whether a yield is sustainable, investors look at it alongside the payout ratio (the share of earnings paid as dividends). A high yield backed by a comfortable payout ratio and steady profits is reassuring; a high yield funded by a stretched payout or falling earnings is fragile.

A few cautions when using dividend yield:

- It ignores capital growth. A low-yield company reinvesting for growth can deliver a higher total return than a high-yield, slow-growth one. Yield is only part of the picture. - Trailing vs forward. A yield based on last year's dividend may not reflect what the company will actually pay next — check whether the payout is likely to be maintained. - Taxes and timing. Dividends are typically taxed, and the figure assumes the payout continues.

Used wisely, dividend yield is a quick gauge of the income a share offers and helps compare payers across the market — but it should always be read together with the company's earnings, payout ratio, and growth prospects rather than chased on its own.