Dividend Yield, what is it
The dividend yield is to put it simply the ratio of what a company pays out per year as a dividend against the share price.
A company’s dividend yield is shown as a percentage. If we wish to calculate the dividend yield it is very easy to do so. I shall give a couple of examples below.
|Ticker||Share Price||Annual Dividend||Dividend Yield|
At the time of writing the above share prices are correct although that is not really relevant.
If we use Realty Income ticker ‘O’, one of my favorite dividend-paying stocks. They also happen to now be a Dividend Aristocrat meaning they have raised their dividend each and every year for 25 years straight!
Let us take their annualized dividend of $2.8 per share ( they also happen to pay their dividend monthly – but we need the annualized amount to calculate the dividend yield).
With this $2.8 we then divide by the current share price of $47.
2.8/47 = 0.059 Is the result, we must then multiply this by 100 so it can be read as a percentage. 0.059×100 = 5.9%
Share price and current annualized dividend found HERE. The dividend yield is also shown to confirm we have the correct formula to work out the yield.
Dividend Yield does it matter
Yes and no.
Many things to come into play but the fact that the yield is tied to the share price means it can fluctuate wildly from day to day with certain stocks. Not so much with larger more stable companies – unless a Stock Market Crash is going on like now.
To settle your mind in relation to the stock market crash, I have just finished reading A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation . It seems more relevant than ever, going in-depth on how and why the major crashes of the past happened.
As share prices have fallen around 20% on average over the last couple of weeks, this has sent dividend yields through the roof.
Most Dividend Aristocrats and Kings will not have an issue with this. They will continue to pay the dividend as usual. However, companies who are struggling may suspend or cut the dividend back to increase cash flow.
Ford has just announced they are suspending their dividend. They have been struggling for a while and already had a pretty high dividend yield to begin with. Now the stock price has fallen to around just $4 per share from around 8-9$ per share before the stock market crash. It is no surprise they had to do something, if they survive this they will likely bring the dividend back. This is rare especially for such a well known large company though.
A good majority will continue to pay their dividend. Meaning we can keep collecting them and re-invest in more shares at a lower price if we so desire while the market is down.
While the yield is good to know along with how long they have been paying a dividend, have they been growing the dividend, p/e ratio earning etc.. You should never open a position in the stock market by just looking at the yield, one must take the whole picture into consideration.
Dividends matter. Evidence suggests that dividend paying stocks have accounted for a lot of the growth in the S&P 500 over the years. This makes sense as most investors are taking their dividends and buying more shares rather than taking it as cash. Doing this will compound over time allowing investors to buy more and more shares every time a dividend is paid, even if they do not directly deposit any more capital and buy shares that way.
Pretty much the only negative to most dividend stocks is they will not normally see any explosive growth and instead will just increase gradually over time.
Most dividends are paid quarterly in the US whilst a lot of UK companies pay theirs twice a year. It’s a fairly even split in my portfolio on the UK side between quarterly and bi-annually.
A small difference but quarterly is always best and you can re-invest and get that money working for you sooner.
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None of the above is financial advice, I am just sharing my experiences.