The Tale of the Golden Harvest: Dividend Payout and Dividend Yield

In the prosperous kingdom of Aurelia, King Magnus ruled over a land filled with hardworking farmers, merchants, and traders. Among them was Lord Evermore, the wealthiest landowner, who owned vast orchards producing the finest golden apples. Each year, the kingdom eagerly awaited the grand apple harvest, which determined the wealth that Lord Evermore would distribute among his investors—the noblemen who had funded his orchards.

The Golden Apple Distribution (Dividend Payout Ratio)

Lord Evermore knew that his orchards generated profits, but he had to decide how much of those profits he would share with his noble investors and how much he would reinvest in expanding his lands.

Each year, the total profit from the apple harvest was 10,000 gold coins. The noble investors eagerly awaited their share, hoping for a generous distribution. After consulting with his advisors, Lord Evermore decided to distribute 6,000 gold coins as rewards to investors while keeping the remaining 4,000 gold coins to plant more apple trees for future prosperity.

The royal accountant calculated:

Dividend Payout Ratio = Dividends Paid / Net Profit = 6,000 / 10,000 = 0.6 (or 60%)

This meant that 60% of the profits were distributed as dividends, while 40% was retained to grow the orchards.

The Value of Each Golden Apple (Dividend Yield)

Not all noblemen in Aurelia had invested in Lord Evermore’s orchards. Some had invested in other businesses, such as grain mills or textile factories. To compare returns, they examined the Dividend Yield, which measured how much gold they received relative to the price of their investment.

Each investor had purchased a stake in Lord Evermore’s orchards at 100 gold coins per share. Since Lord Evermore was paying 6 gold coins per share as a dividend, the royal accountant calculated:

Dividend Yield = Dividends Per Share / Market Price Per Share = 6 / 100 = 0.06 (or 6%)

This meant that investors were earning a 6% return on their investment purely from dividends.

A Balancing Act

Over time, Lord Evermore realized that if he paid too much in dividends, he wouldn’t have enough funds to expand his orchards. But if he paid too little, investors might sell their stakes and invest elsewhere. He had to strike a balance—offering a steady dividend payout while retaining enough profit to grow.

The noble investors also had a choice. Some preferred higher dividend yields, wanting immediate income, while others looked for companies reinvesting their profits for long-term growth.

The Lesson of the Kingdom

Just like in Aurelia, investors in modern stock markets analyze a company’s Dividend Payout Ratio to understand how much profit is being shared and the Dividend Yield to determine the return relative to the stock’s price.

A wise investor, like a wise noble, always evaluates these factors before choosing where to place their gold.

[Finance]