Advanced Diploma of Financial Planning (ADFP) Practice Test

What is the benefit of using the dividend yield measure for selecting stocks?

1. It helps identify stocks with high growth potential

2. It is useful for investors needing income from the portfolio

3. It indicates the company's long-term financial health

4. It provides insight into the stock's volatility

The correct answer is: It is useful for investors needing income from the portfolio

Using the dividend yield measure for selecting stocks is particularly beneficial for investors who are looking for income from their portfolio. The dividend yield represents the annual dividend payment to shareholders divided by the stock's current price. This metric provides a straightforward way to assess how much income an investor can expect to receive relative to their investment. For income-oriented investors, such as retirees or those seeking regular income streams, a higher dividend yield can be an attractive feature because it indicates a potentially reliable cash flow from their investments. Moreover, companies that consistently pay and increase dividends may also suggest stability and a commitment to returning value to shareholders, which aligns well with income-focused investment strategies. In contrast, the other options deal with aspects that are not directly related to the primary objective of utilizing the dividend yield for stock selection. High growth potential and long-term financial health pertain more to capital appreciation rather than immediate income. Similarly, while volatility is an important aspect of stock analysis, dividend yield does not directly provide insights into how volatile a stock may be.