Shares, dividends and yields
A popular method of investing is through buying shares.
- the expectation that over time the value of the company (and thus the value of each share) will increase, meaning a small piece of the company is now worth more.
- Dividends are paid to shareholders when a company makes a profit.
Price-to-earnings ratio (P/E ratio)
As a shareholder we are interested in calculating the amount of profit and how this profit compared to the amount invested in the company.
Calculating the price-to-earnings ratio allows investors to compare different companies or different dividends. The lower the price-to-earnings ratio the better the result for an investor as it shows that they have invested less for each dollar of profit.
Price-to-earnings ratio
P/E ratio$=\frac{current\ share\ price}{dividend\ per\ share}$=current share pricedividend per share
Practice question
QUESTION 1
The annual earnings per share is $\$1.25$$1.25 and the market price of the share is $\$12.25$$12.25.
Calculate the price-to-earnings ratio.
Dividends
Companies share their profits with their shareholders by paying out dividends either as
- a dollar value per share or
- a percentage of current price of the share which is known as a dividend yield.
Dividends and yields
Dividend per share $=\frac{company\ profit}{total\ number\ of\ shares}$=company profittotal number of shares
Dividend yield $=\frac{dividend\ per\ share}{current\ share\ price}\times\frac{100}{1}$=dividend per sharecurrent share price×1001 %
Practice questions
Question 2
Calculate the dividend per share when a company's net profit of $\$373520$$373520 is to be distributed evenly among its $128800$128800 shares.
Question 3
Calculate the dividend yield (correct to one decimal place) when a firm with a share price of $\$38.20$$38.20 pays a dividend of $\$1.38$$1.38 per share.