Some investors buy shares mainly for regular income, much like earning profit on a bank deposit. Dividend yield tells you how much cash income a share pays each year compared with its price.
What is a dividend?
When a company makes a profit, it can keep the money to grow or share some of it with its owners. The part it pays out in cash is called a dividend. Companies on the PSX may pay dividends once a year (final dividend) or several times a year (interim dividends).
Dividend yield formula
Worked example
Margalla Power Ltd (fictional) paid total dividends of Rs 12 per share last year. Its share price is Rs 150.
Dividend yield = 12 ÷ 150 × 100 = 8%
If you invest Rs 150,000 (1,000 shares), you would receive about Rs 12,000 a year in dividends before tax, as long as the company keeps paying the same amount.
How Pakistani companies announce dividends
This confuses many new investors. PSX companies often announce dividends as a percentage of face value, not of the share price. Most shares have a face value of Rs 10 (some have Rs 5 or Rs 1, so check).
A company announces a "cash dividend of 50%".
With a face value of Rs 10, that is 50% × Rs 10 = Rs 5 per share, even if the share trades at Rs 200.
The dividend yield is therefore 5 ÷ 200 × 100 = 2.5%, not 50%.
Payout ratio: is the dividend safe?
If Margalla Power earns Rs 16 per share and pays Rs 12, its payout ratio is 75%. A company paying out more than it earns (above 100%) for several years may have to cut its dividend in future.
Beware of the "high yield trap"
Dividend yield rises when the share price falls. A yield of 20% may look attractive, but often the price has dropped because investors expect trouble, and the next dividend may be much smaller. Check that profits and operating cash flow are stable enough to keep paying.
Bonus shares and right shares are not cash dividends
- Bonus shares (stock dividends): the company gives you extra shares instead of cash, for example a 10% bonus means 1 extra share for every 10 you own. Your share of the company stays the same, and the share price usually adjusts down.
- Right shares: an offer to buy new shares, usually at a discount. You pay for these; they are not income.
Who receives the dividend?
To receive a dividend, you must own the share before the company's book closure / ex-dividend date announced with the dividend. If you buy on or after that date, the dividend goes to the seller. On the ex-date, the share price usually drops by roughly the dividend amount.
Tax on dividends
In Pakistan, tax on dividends is deducted at source before the money reaches your account. Non-filers pay a higher rate than filers, so being on the Active Taxpayers List directly increases your dividend income. Rates can change in each budget, so check the current rate with FBR or your broker.