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What is a Dividend Rate?
A company’s dividend rate is the total sum of all the dividends it pays out in a year. Effectively, the dividend rate tells shareholders how many dividend dollars they can expect their investment to generate.
Understanding Dividend Rates
A company pays its shareholders dividends out of its profits, but the amounts vary between companies and industries. Usually, mature companies with fewer avenues for growth pay higher dividends, as they have more cash to spare.
Meanwhile, younger, fast-growing companies invest heavily in employees, infrastructure, and research and development.
For those companies that do pay dividends, the dividend rate can signal the company’s financial position.
For instance, reasonably high dividend rates indicate that management is confident in the company’s cash flow while also suggesting the company can’t or won’t commit to new expansion projects at this time.
For large, mature companies, that’s not always a bad thing – but for younger companies, that may be a red flag.
By contrast, a low dividend may suggest that the company prioritizes growth over shareholder dividends.
And in cases where the company has recently cut the dividend, lower rates indicate a struggling company looking to free up some cash flow.
Calculating a Dividend Rate
To calculate the dividend rate on a share of stock, all you have to do is add up the dividends paid out per share per year.
For instance, if you receive a dividend of $1 per quarter per share of Company A, then your dividend rate is $4/year.
If you own more than one share of a company, you can multiply the rate by the number of shares you own to see your total annual payout.
Dividends: Frequently Asked Questions
What is a good dividend rate?
What is considered “good” varies significantly when it comes to dividends.
Consumer non-cyclical stocks, such as healthcare, grocers, and utilities often pay the highest average rates. These tend to be value stocks, although that is not always the case. The same is true of other cash-intensive companies that don’t splurge on frequent expansions and some niche products like real estate investment trusts. By contrast, the tech industry is notorious for its comparatively low dividend rates.
But, for a ballpark number, a good dividend usually ranges from 2-6%. For a stock worth $100 per share, that amounts to $2-$6 per share per year.
What does the rate of dividend mean?
The rate of dividend is the sum that an investor receives from a company over one year for owning one share of company stock.
How do dividend rates work?
When a company has excess cash, it may pay dividends to its shareholders. The total cash amount that an investor receives per share is the dividend rate.
How much is a 4% dividend?
That depends on the share price. For a stock worth $100, a 4% dividend is $4 earned per year, or $1 per quarter. For a stock worth $1, a 4% dividend is $0.04 per year, or a penny per quarter.
Bottom Line: Dividend Rate Definition
The dividend rate puts an investor’s annual per-share return into plain dollars and cents.
Note that the dividend rate (a dollar sum) differs from the dividend yield (a percentage calculated by dividing annual dividends by share price). However, you can’t have the yield without the rate.
Knowing a security’s dividend is often crucial to income investors seeking new sources of revenue. For those individuals, it’s often best to start with companies with a long history of paying or increasing dividends.
That said, you can also capitalize on a company’s future growth potential if you get in when the company is young and dividends are low.