Dividend yield
Annual dividend ÷ current share price. A 6% yield means the stock pays you 6% of its price in dividends per year. Note: in Nigeria, the company already deducts 10% WHT — what you receive is net of tax.
Imagine you buy shares in a company like MTN Nigeria, and every year, the company shares part of its profits with you as a shareholder. This extra money you get on top of your investment is called a dividend. Now, to understand how much you are earning from these dividends relative to the price you paid for the shares, we use the term "dividend yield." For instance, if you bought MTN shares at ₦200 each and the company pays a ₦12 dividend per share annually, the dividend yield would be 6% (₦12/₦200).
In Nigeria, when companies pay out these dividends, they automatically deduct 10% as Withholding Tax (WHT). So, if MTN Nigeria declares a ₦12 dividend, you will actually receive ₦10.8 after the tax deduction. This means your effective dividend yield is slightly lower than the initial percentage, but it's still a useful measure to compare different investment opportunities.
To put it in a relatable context, think of it like this: if you have a friend who owns a fruit stand and you buy ₦200 worth of fruits from them, and they give you an extra ₦12 of fruits at the end of the year, that's like getting a 6% dividend yield. But if they give you ₦12 and keep ₦1.2 as tax, you're left with ₦10.8, which is still a nice bonus but slightly less than you initially thought.
When comparing this to other investment options like Treasury Bills (T-bills), where the Central Bank of Nigeria (CBN) offers a fixed interest rate, the dividend yield helps you see how much you might earn from stocks versus fixed-income instruments. For example, if the CBN's Monetary Policy Rate (MPR) is around 27.50%, and T-bills offer a similar return, you might weigh the risks and benefits of each investment. Remember, stocks can be riskier but also offer higher potential returns.
Why it matters: Understanding dividend yield helps you make informed decisions about your investments. It tells you how much income you can expect from your shares relative to their cost, helping you compare different stocks and other investment options like T-bills. This knowledge allows you to build a well-rounded investment portfolio that aligns with your financial goals and risk tolerance, whether you're saving for your children's education or planning for retirement.