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  1. 058A company trades at 15x earnings and pays out 40% of its earnings as dividends. What is its dividend yield?Valuation riddlesWarm upJefferiesChicago · 2026

    Try it first

    Which is the dividend yield?

    Show the worked solution

    About 2.67%. A P/E of 15 means each Rs 100 of share price buys Rs 6.67 of yearly earnings, an earnings yield of 1 over 15. The company pays out 40% of that, Rs 2.67, as dividend. Dividend yield is dividend over price, Rs 2.67 over Rs 100. In one line: the payout ratio divided by the P/E, 0.40 over 15.

    How do you turn a P/E into something you can multiply?

    Flip it. A P/E of 15 says you pay 15 rupees for every rupee of yearly profit, so every rupee of price buys one fifteenth of a rupee of profit. Inverting the P/E gives the earnings yieldEarnings per share divided by the share price: the inverse of the P/E., 1 over 15 or about 6.67%, and every other per-share ratio then falls out by multiplication. Picking a round share price of Rs 100 makes it concrete: earnings per share are Rs 6.67.

    Walk from a Rs 100 share down to the dividend, one step at a timeShare priceRs 100÷ P/E of 15Earnings per shareRs 6.67x 40% payoutDividend per shareRs 2.67÷ Rs 100 priceDividend yield2.67%The Rs 6.67 of earnings, splitDividend Rs 2.67Kept in the business Rs 4.0040%: paid out in cash60%: reinvested to grow future earningsthis is the dividend yieldearnings yield = 6.67%, the whole bar
    A Rs 100 share at 15x earnings carries Rs 6.67 of earnings; paying out 40% gives a Rs 2.67 dividend, a 2.67% yield, while the other Rs 4.00 stays in the business.

    Why is the dividend only part of the shareholder's return?

    Think of a shopkeeper who takes home 40% of each year's profit and leaves 60% in the shop to buy more stock. The retained Rs 4.00 is not lost to shareholders; it is reinvested, and if it earns a decent return it should lift future earnings and dividends. That is why a low dividend yield on its own says little about whether a share is cheap. A company paying out everything would show a 6.67% yield and little room to grow.

    The relationship
    Dividend yield=DPSP=payout×EPSP=payoutP/E=0.4015=2.67%\text{Dividend yield} = \frac{\text{DPS}}{P} = \frac{\text{payout} \times \text{EPS}}{P} = \frac{\text{payout}}{P/E} = \frac{0.40}{15} = 2.67\%
    DPSdividend per share
    EPSearnings per share
    payoutthe share of earnings paid as dividend, 40%
    P/Eprice over earnings per share, 15
    What it says in wordsDividend yield is the payout ratio divided by the P/E, because both are measured against the same share price.

    Say the general rule after the number, because the follow-up usually changes one input. If the P/E doubles to 30 with the same payout, the yield halves to 1.33%; if the payout doubles to 80% at the same P/E, the yield doubles to 5.33%. Having the one-line formula ready means you answer those in a breath.

    Where candidates lose it

    The trap is answering 6.67%, the earnings yield, because 1 over 15 is the first thing anyone computes. Dividends are the part of earnings paid in cash, not all of it.

    The other slip is multiplying instead of dividing, 40% times 15, and saying 6.0. Pinning a share price of Rs 100 and walking down to earnings and then to the dividend keeps the direction right.

    What the interviewer asks next

    • If dividends grow at 5% a year forever, what cost of equity does this price imply?
    • The payout rises to 60% and the share price does not move. What is the new yield, and what might the market be thinking?
    • Why might a fast-growing company pay no dividend at all?

    Asked at Jefferies, Mergers and Acquisitions, Chicago, 2026 (Wall Street Oasis): what are specific line items in the BS, some very simple P/E calculations, etc.