Investor ratios

Dividend yield is “cents return per $ invested” – if you are a “short-term” investor, looking for a quick reasonable return on your investment, you may choose to invest in a company which has a high dividend yield history. If you’re in there for the long term, you may choose a company with a low yield – this would often indicate a high retention rate – the %age of profits available which have NOT been allocated as dividend. High retention suggests the directors are holding back from distribution a greater than “normal” 5age of profits in order, for example, to finance future growth.

Dividend cover is the same as retention rate, just the other side of the same coin. How many times could that same dividend have been paid out of the available profits?

For example, profits available for distribution are $100, dividend is 4 cents per share and a total of $5, share price is 80 cents. Dividend yield is 4 cents / 80 cents * 100 = a 5% dividend yield. Dividend cover is 100 available / 5 total dividend = 20 times. Retention rate is 95 ( ie 100 – 5 ) / 100 = 95% retention.

PE Ratio is mid-market price per share / earnings per share. Our earnings in the above example were $100. Total NUMBER of shares were 125 ( dividend of 4 cents per share * number of shares equalled $5 ) – but I now want to change that – to make sense of this next calculation – to 1,250 shares. So earnings per share were $100 / 1,250 = 8 cents. each share has earned 8 cents, and mid market price is, as above, 80 cents. PE ratio is therefore 80 / 8 = 10. Effectively, though you are not meant to interpret it this way, it means it’s going to take ten years at this rate of earnings for each share to earn its own value. That’s what it means – BUT YOU MUST NOT SAY THIS – too many things change – particularly the mid-maret price which changes on a daily basis.

Hope that answers your question!