What dividend yield actually tells you
Dividend yield is one number that tells you how much annual income you’re getting relative to what you paid for the stock. It’s calculated as annual dividend per share divided by current price, expressed as a percentage.
A stock trading at ₹500 that pays ₹15 annual dividend has a 3% yield. If the price falls to ₹300, the same ₹15 dividend gives a 5% yield. This is why yield and price move in opposite directions — and why a suddenly high yield isn’t automatically good news.
The yield trap
High yield is attractive. But a stock with 8% dividend yield is usually trading at a suppressed price — often because growth is slow or the business is declining. Coal India yields 6-8% because the market assigns it low growth prospects.
Growth stocks reinvest profits instead of paying dividends. Infosys, HDFC Bank, Asian Paints — their dividend yields look low (0.5-1.5%), but total shareholder return over 10 years has been far higher than most high-dividend PSU stocks.
PSU dividends and why they’re special
PSU (Public Sector Undertaking) companies pay high dividends partly because the government, as the major shareholder, needs dividend income for fiscal planning. NTPC, Power Grid, Coal India, and ONGC regularly pay dividends mandated partly by government policy.
For an income investor, a PSU dividend portfolio can be predictable. But capital appreciation is usually modest. The dividend doesn’t compound unless you reinvest it into more shares.
Dividend tax math for 2025-26
Dividends are now taxable at your slab rate. No special rate, no exemption. If you’re in the 30% bracket, your effective post-tax yield on a 4% stock is about 2.8%.
TDS: if total dividend from one company crosses ₹5,000 in the year, 10% TDS is deducted. You can claim this in your ITR. If your total income is below the taxable limit, file Form 15G to avoid TDS.
For someone in the 0% tax bracket (income below ₹7 lakh under new regime after rebate), dividends are effectively tax-free — you’ll get the TDS refunded.
A note on payback period
The calculator shows payback period: how many years it takes to recover your investment through dividends alone (assuming no price movement). On a 3% yield stock, that’s 33 years. On a 6% yield, it’s 17 years.
This is purely mathematical. In practice, prices change and dividends change. No stock analyst uses payback period as a standalone metric. But it’s useful to visualize just how long dividend income takes to compound into meaningful wealth without price appreciation.
The better use: combine dividend income with price appreciation (CAGR) to get total return. A 3% yield plus 12% CAGR = 15% total annual return, which is how the best dividend-growth stocks actually work.