Business, Legal & Accounting Glossary
Dividend per share divided by current market price.
The annual dividend income per share received from a company divided by its current share price.
Put simply – how much income are you getting out of the company for the capital you’ve got locked up in it?
Dividend yields are calculated on the net dividend.
For example: a company declares a net dividend of 2.1p per share. Its share price is 150p.
To get the dividend yield, divide the net dividend by the current share price:
2.10 /150 = 1.4%
The dividend yield is 1.4%. Note that the higher the share price, the lower the dividend yield. Using the above example, if the shares rose to 200p, the yield would fall to 1.05%
2.10/200 = 1.05%
Older, slow-growth companies usually have a relatively high dividend yield, because they have fewer investment opportunities and thus tend to return more earnings to shareholders. Newer, high-growth companies usually have a low or no dividend yield, because most or all of their earnings are reinvested in their business. For a slow-growth firm with fewer prospects of substantial price appreciation, the higher dividend yield serves to make the stock more attractive and support the stock price.
Dividend yield plays a key role in the Dogs of the Dow investment strategy, in which investors rotate into those blue chips with the highest dividend yield. But beware: a high dividend yield is no sure measure of a safe, high-return investment. A stock may have a high dividend yield only because its price has fallen sharply on expectations that the company faces hard times and will cut its dividend.
The problem for investors is that if a company has a low dividend yield compared to other companies in its sector, it can mean two things. Either it means the company’s share price is high because the market reckons it’s got great growth prospects and doesn’t care too much about income, or it means that the company’s a busted flush and can’t afford to pay decent dividends.
Note that dividend yield changes because of two things. First, the stock price goes up (yield drops) or down (yield increases). Second, the company increases the dividend (yield increases) or cuts the dividend (yield drops).
Dividend yield is an important part of your rate of return on an investment. If you purchase a stock that goes up by 8% in a year while paying a 3% dividend, then you’ve earned 11% on your money.
Personal dividend yield can also be increased if you reinvest any money received as a dividend into more shares of the company, even if they are fractional shares. If you do this, you’ll receive even more dividends the next time. Keep on doing this long enough and you could end up getting in annual dividends the amount of money you originally spent to purchase the stock. 100% yield — how cool is that? Of course, this is helped along by the company steadily increasing dividends as their earnings increase.
The size of the dividend yield is often tied to the industry. For instance, utilities have traditionally been steady payers of relatively high dividends while software companies have traditionally not paid dividends (for a “zero” yield).
However, there are categories of investments where the dividend comprises a major portion of the return from the investment:
This type of corporate structure is set up in such a way that they are required, by law, to pay out the vast majority (>90%) of their taxable income to their shareholders.
Investors interested in income are likely to be interested in companies with high yields. However, in normal times, most sustainable dividends are in the (approximately) 2% to 5% range. If the company you are looking at has a yield well above that range, especially if it is above 10%, look more closely to find out why. Companies with such a large dividend often cut it to preserve cash and you’ll be stuck with a stock that might not be worth owning.
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This glossary post was last updated: 5th August, 2021 | 3 Views.