In this article we will explore dividend yield, dividend investing, and how growth and value investors approach returns differently.
Dividend has always been an important consideration for investors while starting their investment journeys. The majority of investors want to have a regular recurring income while their investment grows in size. Dividends fulfill this demand. When an investor plans to invest his or her money in a certain company, the two most important considerations are the dividends and capital gains. Dividends are the regular payments that companies make out of their profits to investors. When a company earns a certain amount of profit, say for example in a quarter, then it has two options. First is that the company keeps those profits in its company bank account and utilize it for funding growth opportunities. For example launching a new product or service line. Second option with the company is to distribute those profits among its investors proportionately. This distribution of profits is known as dividend payment.
Now investors who prefer the first option of letting a company to reinvest the profits earned in to growth opportunities are known as growth investors. They want the company to grow by investing in new opportunities and thus hoping the shares they hold will increase in value. If a company invests in new profitable growth opportunities, its profits will increase in the future. This will attract new investors to the company and the company’s shares will be in demand. As the demand increases, the price of the company’s shares will go up. Thus an investor holding a certain number of the company’s shares will see an increase in its wealth through capital gains. If a share purchased at $10 increases in price to $15, the investor will gain $5 per share which is known as capital gain.
On the other hand, investors who prefer the second option of receiving regular dividends from the company profits are known as dividend focused investors. These investors, thus invest in companies which have a history of dividend payments. Such companies are mostly mature companies who have already invested much in the growth opportunities and thus now want to return the profits to shareholders.
Now let’s come to the discussion of dividend yield. It’s an important indicator for value investors who want to know the company’s dividend history and its future plans. Dividend yield simply means how much dividend a company yields per share as compared to the price per share. Its formula is dividend per share divided by price per share. A question may come to your mind as to why we compare the dividend to price in the dividend yield formula and not net income or any other metric. The answer is that we want to know the return on our investment through the dividend yield formula. If you have purchased a share for $10 and it pays a quarterly dividend of $1 per share, then your dividend yield (the return on your investment) will be $1 divided by $10, which is equal to ten percent per quarter.
Now you might be thinking whether a ten percent dividend yield per quarter is good enough or not? To get a rough idea, as of today on December 17, 2025, there are around five hundred listed stocks in U.S. that offers a dividend yield of more than ten percent out of around eleven thousand distinct tradeable stocks in the U.S. stock markets. Thus it can safely be assumed that ten percent dividend yield is very high.
Should you consider only the dividend yield when wanting to invest in a dividend paying stock? The answer is no. A comprehensive analysis of the company’s financial health is needed to make sure that the dividend is sustainable. You should look for companies that have a history of dividend payments. Company management usually avoids cutting dividend payments once they start paying them regularly. If a company imposes any cut on its dividends, it straightaway gives a negative signal to investors that the company is finding it hard to generate profits and is in trouble. Thus a company with a long history of dividend payments is obviously a better choice than the one with a higher yield with no history.
The industry in which a company operates also determines its dividend paying ability. For example companies in the Utilities, financials, consumer staples, energy and telecom sector are in a better position to pay dividends to its shareholders. These companies mostly provide essential goods and services and thus they have a stable demand for their services, which leads to predictable revenue streams and strong cash generating abilities. On the contrary to this, companies in high growth sectors generally prefer not to pay dividends. Companies in sectors such as technology and media, and biotech and health sectors pay lesser dividends. These companies utilize their earnings to fund new projects and invest in research and development to stay competitive. Investors, for example, invest in biotech firms in the hope of launching a successful product which will significantly increase the stock price.
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