ACCA Financial Management (F9) Certification Practice Exam

What does the dividend yield represent for a shareholder?

1. The total dividends paid over a year

2. The expected return on shares

3. The company's overall profitability

4. The historical price appreciation of shares

The correct answer is: The expected return on shares

The dividend yield is a financial ratio that indicates how much a company pays in dividends each year relative to its share price. It is expressed as a percentage and can be calculated by dividing the annual dividend paid per share by the market price per share. This metric helps shareholders understand the return they can expect from their investment in the form of dividends, distinguishing it from potential profits that might come from capital appreciation. Understanding this concept is critical for investors aiming to generate income from their investments, as it provides insight into how much cash they can expect from dividends compared to the amount invested. In this context, the expected return reflects both the cash flow received and the risk associated with holding the shares. The other options do not encapsulate the purpose of the dividend yield. While total dividends paid provides insight into the company's cash distribution, it does not relate dividends to share price. The company's overall profitability can influence dividend payments but is not the same as the yield itself. Lastly, the historical price appreciation of shares pertains to capital gains, which is separate from the income an investor receives through dividends.