What does the term "dividend yield" measure?

Dividend yield is a key financial metric that measures the annual dividend payment made by a company in relation to its stock price, expressed as a percentage. This measurement is crucial for investors who are looking to assess the income generated from their investments in stocks. By calculating the dividend yield, investors can evaluate the potential return on investment relative to the price they pay for the stock.

For instance, if a company pays an annual dividend of $2 per share and its stock is currently trading at $40, the dividend yield would be calculated as follows: $2 (dividend) divided by $40 (stock price) equals a 5% dividend yield. This indicates that the investor earns 5% of their investment's value in the form of dividends annually, which is particularly appealing for those focused on income generation from their portfolios.

The other options do not accurately define dividend yield. The rate of interest paid on loans pertains to borrowing costs, total earnings before taxes relate to a company’s financial performance, and profit margin indicates how efficiently a company converts revenue into profit. Each of these terms applies to different aspects of finance and investing, not to the specific metric of dividend yield.