Shares are a different kind of investment, you own a small piece of a company. The return comes from two sources: the dividend (regular cash payment) and the capital growth (the share going up in price). This page covers how to measure both.
Dividend yield, regular income
Capital growth, price change
P/E ratio, market measure
New topic alert. Shares and dividends don't require compound interest, they use percentage calculations and ratios. The maths is lighter, but the concepts are new. Take a moment to understand what each metric is actually measuring before jumping to the formulas.
If you only do one thing
Dividend yield = dividend ÷ share price. It lets you compare shares of different prices fairly.
The 10-minute version
Low energy? Do just this and you have still won the day. Zero is the only fail.
The one move: read the first formula box and the first worked example above, then do Practice Question 1. Screenshot the win for Nat and stop there.
The total cash received from dividends over a period.
Total = DPS × shares owned
(DPS = dividend per share)
📉 Dividend Yield
Dividends as a percentage of the share price. Tells you the income return.
Yield = (DPS / Price) × 100%
📐 P/E Ratio
Price-to-Earnings. How much investors pay per dollar of earnings.
P/E = Price / EPS
(EPS = earnings per share)
📈 Capital Growth
The percentage increase in share price from purchase to now.
Growth = (New − Old) / Old × 100%
Total Return, combining both income sources
Total return (%) = Capital growth (%) + Dividend yield (%) This combines the price gain with the dividend income into one overall return.
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Dividend yield, worked examples
Worked Example A · dividend yield
BHP shares are trading at $42.00. The annual dividend is $1.68 per share. Find the dividend yield.
Formula:Yield = (DPS / Price) × 100
Substitute:= (1.68 / 42.00) × 100
Answer:= 0.04 × 100 = 4.0%
This means for every $100 invested in BHP at this price, you receive $4.00 per year in dividends.
Worked Example B · total dividends received
Mia owns 800 shares in a company that pays an annual dividend of $1.25 per share. How much does she receive in total?
Total:800 × $1.25 = $1,000
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Price-to-Earnings (P/E) ratio
The P/E ratio tells you how many dollars investors are paying for each dollar the company earns per share. A P/E of 15 means investors pay $15 for every $1 of earnings.
P/E Ratio
P/E = Share price / Earnings per share (EPS) Higher P/E = investors expect faster growth (or the share may be overpriced)
Worked Example C · P/E ratio
A company's shares are trading at $40.00. The earnings per share (EPS) is $8.00. Find the P/E ratio.
P/E:40.00 / 8.00 = 5
Investors are paying $5 for every $1 the company earns per share.
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Capital growth and total return
Worked Example D · full investment analysis
Jordan buys 200 shares at $25 each. One year later the shares are worth $28, and the company paid a dividend of $1.00 per share.
Watch out: Dividend yield can be calculated using either the purchase price or the current price, check what the question asks for. In most exam questions, use the price given in the question context.
Practice Questions
1. A company pays a dividend of $2.00 per share. If you own 500 shares, how much do you receive in total?▶
Total = 500 × $2.00 = $1,000
2. A share is priced at $20.00 and pays an annual dividend of $1.00 per share. What is the dividend yield?▶
Yield = (1.00 / 20.00) × 100 = 5%
3. A company's share price is $40 and its earnings per share (EPS) is $8. Find the P/E ratio.▶
P/E = 40 / 8 = 5
4. Alex buys shares at $50 each. A year later they're worth $65. What is the capital growth percentage?▶