What does the dividend yield represent?

The dividend yield is an important financial metric that indicates how much a company pays in dividends relative to its share price. Specifically, it is calculated by taking the annual dividend payment and dividing it by the stock's market price. This ratio provides investors with insight into the income they can expect relative to their investment in the stock, serving as a measure of the return on investment from dividends alone.

For example, if a company pays an annual dividend of $2 per share and its current stock price is $40, the dividend yield would be $2 divided by $40, which equals 0.05 or 5%. This figure helps investors compare dividend-paying stocks and assess the income potential of their investments.

Understanding this metric is particularly useful for income-focused investors looking for stocks that generate cash flow, as it highlights the yield they would receive based on current market conditions. The other choices do not accurately describe this concept; they refer to aspects of company performance or distribution that do not directly measure how much return an investor receives from dividends relative to the share price.