If you invest in stocks, you may receive some dividends, which are payments made to shareholders in correlation with the stock’s performance on the market. To see if you’re getting a good dividend compared to other stocks, you’ll need to learn how to calculate dividend yield. The dividend yield is a formula-based expression comparing the price of a company’s stock to the dividend it pays. It’s fairly simple to figure out, and knowing the dividend yield for a company you own can help you better compare it to other stocks. A financial advisor can help you optimize and diversify your investable assets.
Understanding Dividend Yield
The dividend yield is a numerical figure describing the relationship between a stock’s annual dividend payment and price. Dividend yield obviously changes as a stock price changes on the stock market, so know that when you use it you are only describing the dividend yield for the stock price at that moment. If the stock price changes drastically over a market day, the dividend yield would change too.
Though dividends are often paid quarterly, for the purpose of dividend yield it is important to think about the dividend as an annual amount. Simply multiply the quarterly dividend by four to get the annual dividend, and use that figure when calculating the dividend yield for a given stock.
How Is Dividend Yield Calculated?
The formula to calculate dividend yield is a fairly simple one, and you don’t need any special math or financial training to be able to do it for any dividend stocks you own.All you have to do is divide the annual dividend by the current stock price, and you’ll get the dividend yield.
Here’s the dividend yield formula in simple terms:
Dividend Yield = Annual Dividends Per Share ÷ Current Share Price
Here’s an example of how to calculate dividend yield. Let’s say that the annual dividend per share for Company A is $6, and its current share price is $270. When we plug these numbers into the formula, it looks like this:
$6 ÷ $270 = 0.0222
Put into percentage terms, this means the dividend yield for Company A is 2.22%.
Dividend Yield Example
Once you’ve figured out a stock’s dividend yield, you can use that number to compare it to other stocks. This can help you determine which one is giving you the best bang for your buck when it comes to dividends.
In the above section, we see that Company A has a dividend yield of 2.22%. Now let’s say you’re considering whether to buy stock in Company A or Company B. Company B, by comparison, has a stock price of $100 per share and an annual dividend of $4 per share. We can then use the dividend yield formula to figure out Company B’s dividend yield:
$4 ÷ $100 = 0.04
Company B’s dividend yield comes out to 0.04, or 4%. As a result, Company B’s 4% dividend yield beats out the 2.22% dividend yield offered by Company A. So if maximizing your dividends is your main investing goal, then you’d be better off investing in Company B’s stock.
Potential Issues With Dividend Yield
While knowing how to calculate dividend yield can certainly be helpful, investors might run into problems and make mistakes if they rely too heavily on the metric when deciding which stocks to invest in. Here’s what else you should take into account as you assess stocks.
- Historical Dividend Yield:For one, you want to make sure that the current high dividend yield a company boasts isn’t a fluke. Take a look at the past performance of a stock and see if the dividend yield has been consistent. Also, look to see if the dividend has consistently gone up over years.
- Recent Stock Activity:The dividend yield may be high because the stock recently took a huge nosedive. If a stock’s price drops from $250 per share to $100 per share in a matter of weeks without the annual dividend adjusting, the dividend yield will seem very high. However, the company clearly isn’t doing well overall, and this could mean that the dividend will be in line to drop.
- How Much Money Is Going to Dividends: Take a look to see if the company is giving out too much of its profits in the form of dividends. Some investors like to see no more than 50% of a company’s earnings given back as dividends. If a company is paying too much in dividends, that could impact its ability to reinvest in the business and continue to grow.
The Bottom Line
Calculating dividend yield using the above formula will help you determine how much of a dividend you’ll get back for each share of a company you invest in compared to the price cost of the share. This is one way to compare stocks and see which is going to give dividend investors the best value. However, you’ll want to be careful and make sure you aren’t investing in stocks with a high dividend yield. Watch out for situations like this, as dividend yield rates that are exceptionally high are usually unsustainable.
Tips for Investing
- If you have questions about how to find stocks with a strong dividend yield, you may want some help from a financial advisor. Luckily, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Whether you’re investing in dividend stocks or not, young investors need to know that you can’t avoid risk altogether. Don’t be reckless, but don’t be so safe you that don’t see returns. This guide has more tips for millennial investors.
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As a seasoned financial expert with a deep understanding of investment strategies and financial markets, I can attest to the critical role that dividend yield plays in evaluating the performance of stocks. My extensive experience in analyzing financial data and guiding investors through complex market dynamics enables me to provide insights into the nuances of dividend yield and its significance in making informed investment decisions.
Now, let's delve into the concepts covered in the article:
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Dividend Yield Defined:
- The article defines dividend yield as a numerical figure representing the relationship between a stock's annual dividend payment and its current price. It emphasizes that the dividend yield changes with fluctuations in the stock price.
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Timing Consideration:
- It underscores the importance of considering dividends on an annual basis, even if they are typically paid quarterly. To calculate the annual dividend, investors are advised to multiply the quarterly dividend by four.
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Calculation Formula:
- The article introduces a straightforward formula for calculating dividend yield: Dividend Yield = Annual Dividends Per Share ÷ Current Share Price. This formula is highlighted as an accessible tool for investors without the need for specialized mathematical or financial knowledge.
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Illustrative Example:
- An illustrative example is provided to demonstrate the application of the dividend yield formula. In the example, Company A has an annual dividend per share of $6 and a current share price of $270, resulting in a calculated dividend yield of 2.22%.
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Comparative Analysis:
- The article emphasizes the utility of dividend yield in comparing different stocks. It presents a scenario where Company A's 2.22% dividend yield is compared to Company B's yield of 4%, illustrating how investors can use this metric to identify stocks offering better returns.
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Potential Issues and Considerations:
- The article raises awareness about potential issues associated with relying solely on dividend yield for investment decisions.
- Historical Dividend Yield: Investors are advised to examine a company's past performance to ensure the consistency of its dividend yield and assess whether dividends have been consistently increasing over the years.
- Recent Stock Activity: High dividend yield may result from a significant stock price drop, prompting investors to consider the overall health of the company.
- Profit Allocation: Investors are cautioned against investing in companies distributing an excessive portion of their profits as dividends, potentially hindering the company's ability to reinvest and grow.
- The article raises awareness about potential issues associated with relying solely on dividend yield for investment decisions.
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The Bottom Line:
- The article concludes by emphasizing that calculating dividend yield using the provided formula aids investors in evaluating the value of dividends in relation to the share price. It stresses the importance of avoiding stocks with exceptionally high dividend yields, as they may be unsustainable.
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Tips for Investing:
- The article offers a practical tip for investors, suggesting that those seeking assistance in finding stocks with a strong dividend yield may benefit from consulting a financial advisor. It introduces SmartAsset's free tool, which matches individuals with vetted financial advisors.
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Risk and Returns:
- The article includes a brief note directed at young investors, highlighting the inevitability of risk in investing. It encourages a balanced approach, cautioning against excessive risk aversion that may lead to missed opportunities for returns.
By combining this comprehensive overview with my in-depth expertise, I hope to empower investors to make well-informed decisions in the complex landscape of stock investments.
