Reduced share prices offer opportunities to investors seeking income through dividends when buying into the market. They may receive increased dividend yields which equate well to other forms of investment income options.
The dividend yield is a way of comparing the dividend you receive versus the current market "value" of a share - "What percentage of the share price am I getting back when I receive a dividend payment?"
It is also a way of comparing the income from shares directly to the income from interest rates available on bank accounts and deposits.
[Formula: dividend yield = (dividend per share / market price) x 100%]
Company: "ABC" Dividend per share = $0.30
Current market price = $2.00
Dividend yield = ($0.30 / $2.00) x 100% = 15%
Initial Investment Value = 5,000 ABC shares @ $2.00 each
= $10,000 worth of ABC shares
Dividend yield = 15%
Expected return on $10,000 = $1,500
Investing with a bankInterestingly, the return on a $10,000 deposit in a savings account or a term deposit at a bank doesn't always measure up to the (potential) return available to an investor who owns ABC shares.
Refer to the fictional scenario below:
Initial investment value = $10,000
Interest rate = 4.00% p.a.
Expected return on $10,000 = $400 (assumes interest paid at maturity)
The dividend paid by the company to distribute profits to shareholders may be hard to forecast. Companies offer guidance on what the earnings and dividends might be throughout the year. These are announced through the stock exchange (like this seen here) or may be available in the investor centre on the company’s website. Larger, more stable and dominant companies with inflexible demand tend to offer similar dividends from year to year, even during tough economic periods.
Of course the risks involved in shares greatly outweigh the risks you face when investing your money with a bank, so it pays to consider if you would be prepared to choose a higher but riskier (potential) return, or if you would prefer to opt for a lower but safer (potential) return. You must decide whether the premium on the potential income offered is worth the investment, as opposed to putting the money in the bank where the interest rates being offered may only just beat inflation.
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