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    Dividend Yield

    The dividend yield is calculated by taking the annual dividend (the amount of ordinary dividends paid out over the year, or the last dividend payment annualized) and dividing by the market price of the share. This informs investors how much cash return each year they can expect to receive as a percentage of their initial investment.

    Like the P/E ratio, the dividend yield is related to the future growth potential of the firm. This is for two reasons. For one, investors will pay more for a stock today with higher future growth potential then one without growth. This will make the market price per share inflated when compared with earnings – giving the stock a higher price to earnings ratio. Because dividends are paid out of earnings, if the price per share is inflated relative to earnings, it is likely to be inflated relative to dividends as well.

    Similarly, investors often do not want high growth firms to pay dividends. If the firm can reinvest retained earnings into high growth projects, investors would prefer that the corporation keep more retained earnings, contributing to higher future growth. 

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