Stocks that pay a healthy dividend are usually a good choice when looking for new investments.
The ratio of dividend payment to stock price is called the dividend yield. It is calculated by dividing the annual dividend per share by the share price.
The result is what percentage return a company pays out to shareholders in the form of dividend. This measurement is important especially when companies are sitting on piles of cash.
When a company has a lot of free cash on hand, management must decide what to do with the money. They can acquire market share by expanding or buying a competitor. They can also make investments in other companies or they can return some of the money to the owners (stockholders) of the company.
Paying dividends may not be the best use of cash, especially for growing companies, however it is often the best choice for investors.
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