Stocks that are paid out in dividends are highly popular among investors for the steady income they bring. The term is fundamental in investment, but it still causes some confusion for beginners.
In this article, you will learn the dividend yield meaning, who needs and uses this indicator, and what formula is used to determine it. You will also get acquainted with examples of dividend yield calculations of famous companies and get answers to the most popular questions on the topic.
So What Is the Dividend Yield?
What is the dividend yield? Dividend yield shows the ratio between the most recent dividends paid to investors and the current share price as a key percentage. It depends on the dividends paid and the company’s stock price and shows how high the percentage per share is.
Why should shareholders know the answer to the question, "What does dividend yield mean?”
Via the dividend yield, investors can evaluate the profitability of their investment. Dividend yields are subject to fluctuations because they depend on the share price and dividends paid. Note that not every company pays dividends to its shareholders: some companies have never paid dividends and put this in their policy; others may decide to do so because of a challenging market situation (e.g., due to the COVID-19 pandemic).
How does dividend yield work?
The very essence of dividends is the right of a shareholder to receive a portion of the company's profits since a share signifies the investor's participation in the issuer's capital. Companies that routinely pay dividends have a distinct advantage for long-term investments. That’s why it’s important for investors to know how dividend yield works.
Knowing the DY ratio is a must:
- When adding new stocks to your portfolio, to analyze and calculate expected returns.
- When calculating the earnings or payback of existing securities.
You can calculate the annual dividend yield by dividing the annual payout by the share price. For example, if Chevron's quarterly dividend payment of $1.19 stays the same throughout 2019, the company will end up paying $4.76 per share in dividends for the year. Chevron stock is trading around $118 apiece. Thus, Chevron's annualized yield is about 4%.
That value is well above the 1.9% yield for the S&P 500. A clear understanding of dividend payouts and how they are carried out will help you find a worthy dividend-paying company and increase potential profitability.
According to Dividend.com, the biggest payouts come from companies that extract and produce raw materials such as oil, gas, metals, chemicals, building materials, timber, or paper products. Financial companies come in second place. They pay an average of 4.96% and 4.18%, respectively. Nevertheless, too high a payout is often a signal that all is not well in a company's business. Why? By paying large dividends to shareholders, a company may not have the funds left to continue growing. In addition, some companies may lure shareholders with high dividends by offering "junk stock."
The Dividend Yield Formula
To calculate dividend yield, use the following dividend yield formula:
Dividend yield = Annual dividends paid per share / Price per share
You can also use a dividend yield calculator for this.
Download the Gainy app to find all the important indicators for investors as easily as possible.
How to Calculate Dividend Yield? Example calculation
Stock dividend yield measures the amount of cash flow received from each dollar invested in a stock and is determined by the number of dividends paid on that stock. The dividend yield, calculated as of a particular day, is independent of changes in the market stock price. Dividend investors who wish to receive a periodic return on their investments not only from asset value growth but can also provide it by buying shares of companies with relatively high and stable dividend yields.
Dividend per share (DPS) is the number of dividends per common or preferred share of a company in dollars.
DPS = NetProfit / NumberOfShares x DPR
- NetProfit is the company's net income, part of which is paid out in dividends.
- NumberOfShares is the number of outstanding common or preferred shares of the company.
- DPR (Dividend payout ratio) is the proportion of the company's net profit, which is used to pay dividends on common or preferred shares.
What does div/yield mean? Dividend yield (DY) is the return (as a percentage over the holding period, from the date of yield calculation to the date of actual dividend payment) on each dollar invested in common or preferred stock from the payment of dividends by the issuer of that stock.
DY = DPSnet / P0 x 100%
Where P0 is the price of the common or preferred share in dollars on the date the dividend yield is calculated.
Let’s do an example calculation to understand the div/yield meaning better:
On May 12, 2016, the closing price per share of Ford Motor Co. on the New York Stock Exchange was $11.70, with an annual dividend of $0.60. Using the formula, we get the yield on the securities on that date: $0.60 / $11.70 * 100% = 5.13%.
Also, we can estimate the yield for the current year by taking into account the indicator for the last year or by applying the last quarterly yield, multiplying it by 4, and dividing it by the current value of the securities.
It is worth noting that in the U.S. 3-5% is considered relatively high. U.S. stocks with high yields (above 10%) are traditionally regarded as high-risk.
How do I know what a good dividend yield ratio is?
To be a successful investor, it is not enough to know the definition of dividend yield. It is important to remember a few essential criteria that investors should focus on when they choose the dividend strategy:
- Dividend yield over 2.5%.
- Payout history and increase in dividends calculated over 10 years.
- Revenue and earnings per share are growing faster than inflation; otherwise, we are dealing with a stagnant business that will eventually go bankrupt.
- The level of debt is acceptable — you can use the ratings of specialized agencies or analyze the business yourself.
- The share of profits allocated to dividends does not exceed 60%. The company's profit is one of the sources of its growth and development. If a company spends all of its profits on dividends, it will have to take out loans to expand its business, which is a bad sign.
- This sector covers everything but real estate (REITs) because REIT dividends are always taxed at 30%.
It is quite normal for the U.S. market to have a low dividend yield. On average, it is about 2-3%. The leaders of the ratings, the so-called "blue chips," show a yield of 5%. The maximum that can be seen is 7%, which should alert a knowledgeable investor: in this way, companies want to increase their attractiveness for investors and therefore may not receive similar interest in the future. But there is also a category of real estate funds (REIT-funds) with a DY of 10%.
The European market follows roughly the same pattern. For higher dividend yields, consider countries whose economies are at an early stage of development, e.g., Russia. However, do not forget about the risks that are inevitable when investing in companies in such countries.
Statistics, history, and analytics of foreign companies are publicly available online.
The top five dividend stocks for 2021 include Best Buy (BBY), one of the largest electronics retailers in the United States; U.S. semiconductor makers Texas Instruments (TXN) and Broadcom (AVGO); JPMorgan Chase (JPM), the No. 1 bank in the United States by asset size; and investment firm T. Rowe Price (TROW).
All investors want to have good dividend stocks in their portfolios because the resulting stocks dividend yields can be reinvested. The best choice would be companies with a good dividend payout history and a simultaneous rise in their stock price.
The table below shows that the dividend yield of Best Buy, Texas Instruments, Broadcom, JPMorgan Chase, and T. Rowe Price stocks exceeds 1.5% of the S&P 500 while outperforming the index by five years. That's a high bar that relatively few stocks meet, especially given the volatility in the market last year.
To choose the best dividend stocks to buy and hold in 2021, investors need to consider several metrics:
- Dividend payment history — how long and how consistently has the company been paying dividends to its shareholders?
- Dividend growth indicates that the company is in good financial health and is working hard to make its stock more attractive to new and existing investors. A company with stable earnings is more likely to pay stable and possibly rising dividends.
- The dividend yield ratio (dividend per share divided by earnings per share) helps assess whether the dividend is sustainable. A financial ratio exceeding 100% can warn of a possible dividend cut.
Hopefully this article helped you to understand what div/yield is, how to determine dividend yield of stocks, who needs this indicator, and how to calculate dividend yield.
The truth is, you don’t have to calculate it. Gainy will make your life so much easier. Forget about complicated calculations, you can easily find dividend stocks and immediately get comprehensive and up-to-date information on the companies that pay them.
How do you calculate the dividend yield?
Have you learned the dividend yield definition but don't yet know how to calculate it? It is worked out using the dividend yield formula: Dividend yield = Annual dividends paid per share / Price per share. Nothing complicated, but you can use Gainy where you’ll find all the important metrics on companies.
The company pays large or small dividends. What does this indicate?
If a company pays high dividends to investors, it could indicate that it is currently undervalued or trying to attract investors. If a company pays low or no dividends, it could indicate that it is overvalued or trying to increase its capital.
Why are dividend yields so low in the U.S.?
It has to do with both the Federal Reserve's low key rate and issuers' caution in the market. In the long run, U.S. firms spend more on company growth and stock appreciation than they do on distributing profits to their shareholders.
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