Wondering What Is Dividend Yield?
How do you define dividend yield?
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Let me explain to you the meaning of dividend yield and why it’s important!
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Table of Contents
What Is Dividend Yield
The dividend yield is a financial measure expressing how much dividends a company pays out to shareholders in relation to the stock price.
In other words, when you calculate the dividend yield, you are calculating the percentage of dividend payments made by the company to its shareholders over the market value of the stock.
For example, if a company pays $4.00 dividends per share annually and the stock price is $100 per share, the dividend yield is 4% ($4 / $100).
There are many investors that adopt a dividend investing approach where they purchase dividend paying securities (or funds owning dividend paying securities) where they can get an attractive dividend yield.
There are some industries or sectors that tend to pay higher dividends compared to other industries, such as utilities, energy, and consumer staple.
Dividend Yield Assessment
The dividend yield provides you with a simple calculation of how much you’d expect to receive in cash return paid in dividends if you were to invest in a stock at the current stock price.
The yield is expressed as a percentage between the company’s annual dividend payments over the stock price per share.
If a company’s yield is going up, it can be the result of:
- The company has increased the amount of cash dividends paid per share
- The company’s stock price going down
- The company increasing dividends per share and stock price going down
If you’re looking at the dividend yield to make an investment decision, it’s important that you don’t just assess the dividend yield in an isolated fashion.
You should consider the dividend yield along with other financial data and measures to assess if the company you intend to invest in is financially strong and can sustainably pay dividends.
Dividend Yield Definition
According to Investopedia, the dividend yield definition is as follows:
The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.
So what does dividend yield mean in stocks?
Well, the “dividend yield” in stocks represents a percentage expressing the relationship between the amount of money a company pays out in dividends in relation to its stock price.
How Dividend Yields Work
Let’s see how dividend yield works and why it’s important.
In essence, the dividend yield represents a financial measure of how much a company pays dividends to its shareholders compared to its stock price.
Since stock prices are constantly moving, the dividend yield is also a constantly moving percentage figure.
Let’s look at two scenarios where one scenario is a company showing a high dividend yield and another scenario where the company has a low dividend yield.
High Dividend Yield
For example, if a company pays $4 of dividends per share, per year, and its stock price is currently $100, its current dividend yield is 4%.
However, if the stock price rises to $200 and the company’s dividend payment (in dollar figures) does not change, then its dividend yield drops to 2% ($4 / $200).
Conversely, if the stock price drops to $50, the company’s dividend yield will rise to 8% ($4 / $50).
As you can see, a high dividend yield does not necessarily mean that you are investing in a quality dividend stock.
If the stock price is declining due to bad company earnings forecasts or other adverse economic factors affecting the company, investors should not focus on what appears to be an attractive dividend yield to invest in that stock.
Investors should do more research to assess whether the company’s fundamentals remain strong and the stock is truly undervalued before investing.
Low Dividend Yield
There are instances where companies have a zero dividend yield or a very low div yield figure.
Dividend stock investors may wonder whether investing in a company with a low dividend yield be worth it.
In fact, companies with low dividend yields can be very good companies with rising stock prices resulting in a lower dividend yield percentage.
If an investor does not look at other company financial metrics, he or she will miss out on the opportunity to invest in a company with strong fundamentals, growing revenues, growing stock prices, and a smaller dividend yield expressed in relation to an increasing stock price.
You should also be mindful of certain industries where dividend yields are low.
For example, in the technology space, companies either pay no dividends at all (thereby a dividend yield of zero) or pay a small amount of dividend resulting in a small div yield.
What Is Dividend Yield Formula
The dividend yield formula is as follows:
Dividend Yield = Dividends Per Share / Price Per Share
To calculate dividend yield, you’ll need to look identify two key figures:
- Dividends per share
- The company’s stock price
To get a more accurate sense of the company’s dividend yield, many investors will use the trailing 12 months dividend figures (the amount of dividends paid out by the company during the past four quarters).
Once you’ve added the company’s dividend payments over the course of the past four quarters, you’ll divide that figure by the current share price to get the current dividend yield.
As a quick shortcut to calculating a company’s dividend yield, you can also take the last dividend per share figure paid by the company in the last quarter and multiply it by four (where you assume the same dividend payment has been paid over the course of the three quarters prior to that payment).
What Is Dividend Yield Ratio
The dividend yield ratio is a number expressed as a percentage of the amount of dividends paid by a company in relation to the company’s stock price.
In essence, a high dividend yield ratio means that the company pays out a higher amount of dividend on a per share basis.
A low dividend yield means that a company pays out a small amount of dividends on a per share basis.
An investor looking to invest in dividend stock will look at a few key financial measures to assess the quality of the stock, such as:
- The dividend yield
- The dividend payout ratio
- The earnings per share
- The retention ratio
What Is Dividend Yield Example
Let’s look at an example of a dividend yield to better illustrate the concept.
Imagine you have a company with the following financial figures:
- Q1 dividend: $1.00
- Q2 dividend: $1.00
- Q3 dividend: $1.50
- Q4 dividend: $1.50
The current stock price is $100.
In this example, the total dividends paid by the company in between Q1 and Q4 is $4.50.
As a result, the current dividend yield is $4.50 divided by $100 equalling 4.5%.
The dividend yield for this stock, as of this moment, is 4.5%.
Now, imagine the stock price doubles and goes up to $200 per share.
The dividend yield will drop from 4.5% to 2.25%.
If the stock price drops to $50 per share, the dividend yield will double and go up to 9%.
What Is A Dividend Yield Takeaways
So, there you have it folks!
What does dividend yield mean?
How do you define dividend yield?
The “dividend yield” refers to the annual dividend payments made to shareholders by a company expressed as a percentage of the current stock price.
For example, if you are looking to buy a stock that offers you a $4 yearly dividend per share and has a stock price of $80, then the dividend yield is 5% ($4 / $80 = 4%).
If you’re looking at the dividend yield to make an investment decision, you should be mindful of the fact that the dividend yield will go up or down as a function of the stock price.
If a stock is doing good and its price per share is rising, your dividend yield will go down (leading amateur investors to think that the stock is not worth investing in).
On the other hand, if a stock is doing poorly and its price per share is rapidly declining, the dividend yield will be artificially high (again, misleading amateur investors to think the stock offers great cash flow).
You calculate dividend yield by taking the total annual dividends and dividing them by the stock price.
Depending on the industry, sector, or company, your dividend yields may vary.
Now that you know the div yield meaning, the current dividend yield definition, and how it works, go ahead and use this figure (along with others) to select the dividend stocks to grow your wealth.
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What Is Dividend Yield In Stocks
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