What Dividend Yield Can reveal to an Investor

Equity investments are a powerful tool for growing wealth because the return on them outstrips most other assets. An investor can utilize many different instruments to figure out the best options and such a simple thing as dividend yield belongs to the basic ones. This article will uncover how an investor can calculate, analyze, and make use of these numbers.

The Meaning of Dividend Yield

A dividend is a slice of profits that a company gives out to shareholders. In contrast to bond interest payments, dividend ones are not always guaranteed. Businesses are free to eliminate or cut them for plenty of reasons, including financial difficulties.

Dividend yield displays how much is paid out in dividends in proportion to their stock price. This indicator allows evaluating the firms paying its shareholders more per invested monetary unit, and how well a company is performing. Dividend yield varies depending on the current price of stocks. There is a plethora of stock research tools to get the list of actual dividend yields, but an investor can always calculate them himself.

How It Is Calculated

The formula is pretty straightforward.

Dividend yield = Dividends Paid Out PS Annually / Price PS, where PS is the abbreviation for ‘per share’.

Thus, $11 being paid for shares whose actual cost is $200 would mean that dividend yield is 5.5%.

How to Obtain Necessary Data

An investor has a few ways to discover annual payouts:

- Annual company reports.

- The latest payout. Quarterly paid sums are to be multiplied by four.

- ‘Trailing’ method. By Adding up the four latest quarterly dividends, we allow for erratic and changing payments.

That yield is seldom consistent should be taken into consideration.

Why Dividend Yield Is Valuable

In addition to understanding the return on investment, it offers a few other plus points to think about:

- The instrument for comparing stocks. Let us consider one example. A and B are companies that pay $7.62 per share (PS). A’s stock cost $80 PS, while B’s stock is sold for $110 PS. The dividend yield of A is 9.9% while B’s one is only 6.92%. The numbers tell that company A might be a better option to invest in.

- A vital economic indicator of short-term financial health. A firm’s raising dividends may display that it is performing well. In general, mature businesses are inclined to pay regular on a regular basis and with better yields, while newcomers prefer to reinvest the money for providing faster initial growth rather than giving them away to shareholders.

- Compound interest. By reinvesting dividends, an investor boosts his returns with help of compounding. In other words, it is when interest earns interest.

Remember that dividend yields that are too high can also be a negative sign. Unexpectedly high values might happen for several reasons. The yield will appear high if stocks have recently suffered a sharp decline and the board of directors has not yet decided to cut payments. To draw the attention of new investors companies sometimes increase their dividends. More people buying stocks means higher stock prices. A careful investor opts for lower, but stable, numbers or chooses stocks with pay rates that are high but still comparable to others in the industry.