Dividend yield

The dividend yield expresses the income a shareholder derives from holding shares in the form of dividends, independently of any capital gain. It is calculated by dividing the dividend per share by the share price, or, for an unlisted company, by the equity value retained. A 4% yield means an investor receives four units of dividend each year for every hundred invested.

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This indicator differs from the Payout ratio, which relates the dividend to net profit and measures the share of earnings paid out, whereas the yield relates that same dividend to the price paid. A high yield may reflect a generous distribution policy, but also a depressed price, which invites analysis of its origin rather than taking it at face value.

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For example, an unlisted SME valued at 8 MCHF pays 320,000 CHF of dividends a year: the yield comes to 4%. If that distribution rested on an exceptional year, the yield would overstate the recurring income the company can genuinely sustain over time.

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In valuing a family-owned SME, the dividend yield sheds light on the shareholder-manager's wealth logic and the level of recurring income the company can support. It also feeds the Dividend discount model, which values the business from the future flows paid to shareholders.