The ratio is calculated as dividend per share (DPS) for the most recent financial year divided by the close price of the stock. Dividend is the portion of company’s profit that is paid out to shareholders. Dividend per share (DPS) refers to the total dividend paid out divided by the common stock of the company.
Suppose DPS is Rs.16 and stock price is Rs.250, dividend yield is calculated as (16/250)*100 = 6.4%
The ratio is used to calculate the earning on investment considering only dividends declared. Higher the dividend yield the better. One should always consider dividend yield when investing in a company’s stock, as it can be significant part of the return that might be generated. High dividend yield stocks could be a good investment avenue to supplement any income needs.