What formula is used to calculate the dividend yield?

The dividend yield is a key financial metric that indicates how much a company pays in dividends each year relative to its stock price. To calculate the dividend yield, the correct formula divides the annual cash dividends paid per share by the market price per share. This allows investors to assess the return on their investment in terms of cash dividends and is useful for comparing the income generated by different investments.

By using this method, the dividend yield is expressed as a percentage, which makes it easier to understand the return relative to the market value of the stock. For instance, if a company pays $2 in dividends per share and its stock is currently priced at $40, the dividend yield would be calculated as $2 divided by $40, resulting in a yield of 5%. This formula helps investors make informed decisions regarding their investment strategy based on potential income from dividends.