Dividend Yield

What is dividend yield?

Dividend yield is the ratio of the dividends paid by a company to its shareholders relative to its current stock price. It is generally expressed as a percentage and is an indicator of the dividend-only return earned by the investor on a stock.

Table of content:

• • Dividend yield formula
  • Top Dividend Stocks
  • Why is dividend yield important
  • Dividend yield and total return
  • Dividend yield vs. Payout ratio

For example, if a company has an annual dividend of $3 per share and is currently trading at a stock price of $100, then its dividend yield is 3%.

Dividend yield formula

Dividend Yield = Annual Dividend Per Share  /  Current Stock Price * 100

Most companies pay quarterly dividends. For such companies, the annualized dividend per share = 4 x quarterly dividend per share.

How To Calculate Dividend Yield

For companies that pay dividends on a monthly basis, like several REITs (Real Estate Investment Trusts), the annualized dividend per share = 12 x monthly dividend per share.

There are two types of Dividend Yield: Trailing Dividend Yield and Forward or Leading Dividend Yield.

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Generally, Forward Dividend Yield is considered a better measure as it takes into account any dividend hike, cut, or suspension of dividends announced by the company.

The top 5 stocks with a high dividend yield

Why is dividend yield important?

The dividend yield is a key metric that indicates the return that an investor earns by way of dividends. Investors who seek steady income may invest in stocks with high yields. However, it is important not to assess a company’s dividend yield in isolation without considering other factors.

Aspects to consider before investing in dividend stocks

The dividend yield is based on the current stock price, it is therefore important to remember that the yield varies with stock price fluctuations. If a stock dividend is the same over a period of time, then dividend yield may appear high or elevated when the stock price is declining. So, if it is considerably higher than its peers, due to a fall in its price, then investors should be cautious as it could be a dividend trap.

Dividend yields vary across industries, generally, utilities and several consumer staples offer higher yields.

Important things to consider aside from the dividend yield include:

– Growth in dividends: Check if the company has been consistently growing its dividends. For instance, dividend aristocrats are companies that have raised their dividends for at least 25 consecutive years.

– Financial strength of the company: It is useful to assess the dividend payout ratio and check whether a company’s earnings and cash flows are good enough to sustain the payout ratio. It is also vital to check debt levels, as a company with high debt might lower its dividends or even suspend them in challenging times.

– Growth prospects: Not only dividend-paying stocks or high dividend yield stocks offer good investment opportunities. New and some high-growth companies choose not to pay dividends or pay lower dividends, as they reinvest their profits in growth initiatives.

What Is the difference between dividend yield and total return?

The total return is a more comprehensive measure of return than dividend yield. While dividend yield is a measure of return based only on dividends, a total return takes into account dividends, any other distributions to shareholders, and capital gain (or loss) in the stock over a certain period of time.

Let’s look at the example of a fictional stock ABC, which has appreciated $20 to $100 over a period of one year and has paid an annual dividend of $5. The total return, in this case, will be:

Dividend yield vs. dividend payout ratio

The dividend Payout Ratio measures the percentage of net income that is distributed to shareholders in the form of dividends, while dividend yield helps to gauge the rate of return earned in the form of cash dividends relative to the stock price.

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Conclusion

The dividend yield is a key financial metric that helps in choosing attractive dividend stocks. However, before making an investment in a dividend-paying stock, investors should carefully look into several other aspects, including growth in dividends paid, the financial strength of the company, and future growth prospects.

FAQ

When is dividend yield paid?

Dividends are usually paid in cash quarterly to shareholders, but there are cases where dividends are paid monthly or annually so the calculation will be accordingly

Can dividend yield be negative?

Dividend yields cannot be negative because the dividend payment will always be positive

what is a good dividend yield?

A good dividend yield depends on various market factors. Usually, stock market investors look for a return between 2% to 6%

Is the dividend yield calculated annually or quarterly?

Usually, the dividend yield is calculated annually, the calculation can be converted to months or quarters (find the formulas above)

What is the difference between dividend yield and payout ratio?

The dividend yield is how many percent of the share price is divided as a dividend, the payment ratio is what percentage of the share earnings are divided as dividends