What does dividend yield represent?

Dividend yield is a financial metric that indicates how much a company pays out in dividends relative to its stock price. It is expressed as a percentage, which allows investors to assess the income generated from their investment in relation to the current market price of the stock.

When you calculate the dividend yield, you take the annual dividends paid per share and divide that by the current market price per share. This provides a clear picture of the return on investment solely from dividends, independent of any changes in stock value.

This metric is particularly useful for investors who seek income from their investments, as it gives them an idea of what they could potentially earn just from dividends, rather than relying on price appreciation alone. Hence, this clear representation of income as a percentage of stock value is key to understanding why it is the correct answer.