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What is Dividend Yield?
A stock’sdividend yield measures how its annual dividend payment compares to the current market price.
Because dividend yields are calculated using both dividend payouts and the per-share price, they can fluctuate frequently or remain relatively unchanged.
Understanding Dividend Yields
Typically speaking, growth stocks have lower average yields because they reinvest excess capital back into their growth objectives.
By contrast, value stocks spend less of a percentage of their earnings on growth and therefore have more capital to divvy among their investors.
Dividend yields also vary between industries. The utilities, healthcare, and energy sectors of the economy, among others, are renowned for their above-average dividend yields.
A few niche securities like real estate investment trusts (REITs) have particularly high yields, as they’re required by law to distribute the bulk of their income back to investors.
However, these dividends often come with higher tax rates.
Investors find dividend yields useful for several reasons.
For one, you can use them to determine a company’s value in your portfolio. Plus, you can examine a company’s dividend yield history to find any red – or green – flags, such as frequent fluctuations or a history of consistent dividend raises.
You can also use dividend yields to compare apples to apples.
For instance, many tech companies have low or no dividend yields (typically under 1%). But a few gems like Qualcomm have dividends above 1.5%, which isn’t bad for a tech giant.
How to Calculate Dividend Yield
Calculating a company’s dividend yield is easy. Simply add up a company’s dividend payouts over a year.
Then, divide that number by the company’s current share price and multiply by 100 to get a percentage.
For instance, if you own one share of stock worth $100, and the company has a dividend rate of $2.50 per quarter, you’d calculate its yield like so:
(($2.50 + $2.50 + $2.50 + $2.50) / $100) x 100% = 10%
With this formula, you can easily calculate any company’s dividend yield, including those that pay out monthly or special dividends.
Example of Dividend Yield
Let’s give a slightly more complex example. Say you own one share of Company A, which is currently worth $25.
Company A pays out a quarterly dividend that fluctuates based on its financial performance. In 2021, it also paid a special one-time dividend to its shareholders:
Q4 special dividend: $1.35
To calculate Company A’s dividend yield, we first have to add all the payments together, like so:
$0.15 + $0.25 + $0.30 + $0.35 + $1.35 = $2.40
Then, we dividend the company’s dividend by its current share price:
$2.40 / $25 = 0.096
And finally, we multiply the number x 100% to get the dividend yield:
0.096 x 100% = 9.6%
Dividend Yield: Frequently Asked Questions
What is a good dividend yield?
Typically, investors seek out companies with dividend yields between 2-6%. That comes out to $2-$6 per year on a stock valued at $100 per share.
But bear in mind that stable dividend yields are often just as important, if not more so, than a company’s one-time “good” yield, as a history of rising dividends suggests a growing company. While higher dividends may seem welcoming, they’re rarely sustainable long-term.
Is a high dividend yield good?
Income-oriented investors often seek out higher dividend yields to pad their portfolios, but they’re not always a positive indicator for the company. Before committing capital, investors should determine if the company’s high dividend yield suggests:
- A company on a strong financial footing with confident, competent management
- A company with few avenues for growth due to its size and maturity
- A sharp stock price decline artificially inflates the dividend yield
- A trap, which occurs when questionable companies offer unsustainably high dividends to reel in investors
One way to ensure you’re not falling into a dividend trap is by checking the company’s dividend history and financial strength. Bear in mind that high dividends can suggest a company that’s not investing in growth – but also a mature, stable company with consistent cash flows.
You should also check the type of investment you’re making, as some securities have unnaturally high dividends to start. For instance, real estate investment trusts (REITs) and Master Limited Partnerships (MLPs) are required by law to pay out a minimum percentage of their income, resulting in higher yields.
Is yield better than dividends?
In this case, you can’t have one without the other! A company’s dividend yield measures its annual dividend payouts against its current stock price.
Why Is Dividend Yield So Important?
Dividends can provide a source of income for investors who need the cash, such as retirees. For these investors, their portfolio’s dividend yield greatly impacts their financial prospects and quality of life.
But the dividend yield is also important for signaling about the company. While taking a dividend yield at face value is often unwise, both high and low yields can clue investors into problems (or bliss) in paradise.
Do All Investments Have a Dividend Yield?
Nope! An investment has to pay a dividend to have a dividend yield.
Bottom Line: What Is a Dividend Yield?
Dividend yields are one way to measure a stock’s potential value to your portfolio and the underlying company’s financial strength. But you shouldn’t examine them in a vacuum.
Instead, use them to help paint a comprehensive picture of a company’s current position and future potential.
This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and public equities research methodology to learn more about how we defined this financial term.