The profitability or dividend yield (in English, yield) is a financial indicator that allows to analyze the current or past state of a company. Financial indicators, known in the financial field as ratios, are calculated by directly dividing two pieces of information.
For its part, the yield shows a percentage relationship that exists between the dividends (that is, a company's share of money that is distributed to shareholders) per share of a company and the price of those dividends. Therefore, the formula is obtained by dividing the dividend by the price of said dividend.
This financial ratio is also used to analyze the profitability of shareholders and see if there are price revaluations and how this may affect the state of the company. The remuneration of an investor can be known using the yield.
Normally, previous exercises are used to analyze whether a company has gained profitability, but the supposed expected dividends for a following year can also be used.
Advantages of using yield
This ratio used with another indicator called pay-out (part of a company's profit that is distributed in dividends) indicate whether a company can distribute its profits among shareholders or allocate them to reservations.
One of the main advantages is to use the yield, to see if a company is profitable or not. There can be two cases:
- If the yield increases every year, it means an investment opportunity since the retribución of shareholders and stocks are cheap.
- If the yield¸, on the other hand, is lower each year, the dividends for shareholders decrease over time and the share price is more and more expensive. Although it may seem a negative data, the company may be expanding and need resources to do so.
As you can see, the yield can be used in various ways to analyze a company and see what strategies can be put into practice.