If you invest in stocks, there is a decent chance that you will receive some sort of dividend, which is a payment to shareholders that is awarded in correlation with how the stock is performing on the market. To see if you’re getting a good dividend in comparison with other stocks, you’ll need to learn how to calculate dividend yield.
Dividend yield is an expression comparing the price of a company’s stock to the dividend it pays. It is fairly simple to figure out, and knowing the dividend yield for a company you own shares of can help you compare it to the dividend yield of other stocks. This can be especially useful if you are a dividend investor looking to use your investments to create income.
What Is Dividend Yield?
Dividend yield is a numerical figure describing the relationship between a stock’s annual dividend payment and its stock price. Dividend yield obviously changes as a stock price changes on the stock market, so know that when you use it you are only describing the dividend yield for the stock price at that moment. If the stock price changes drastically over the course of a market day, the dividend yield would change too.
Though dividends are often paid quarterly, for the purpose of dividend yield it is important to think about the dividend as an annual amount. Simply multiply the quarterly dividend by four to get the annual dividend, and use that figure when calculating the dividend yield for a given stock.
How to Calculate Dividend Yield
The formula to calculate dividend yield is a fairly simple one, and you don’t need any special math or financial training to be able to do it for any dividend stocks you own. Here it is:
Dividend Yield = Annual Dividend/Current Stock Price
It really is that simple. All you have to do is divide the annual dividend by the current stock price and you’ll get the dividend yield.
Here’s an example of how to calculate dividend yield. Let’s say that the annual dividend for one share of Company XYZ is 6.00 and the current share price is $270. When we plug the numbers into the formula, it looks like this:
Dividend Yield = $6.00/$270
After you do the math, you’ll get this answer:
Dividend Yield = 0.0222
Put into percentage terms, that means the dividend yield is 2.22%.
How to Use Dividend Yield
Once you’ve figured out a stock’s dividend yield, you can use that number to compare it to other stocks. This can help you determine which one is giving you the best bang for you buck when it comes to dividend.
In the above section, we figured out that Company XYZ has a dividend yield of 2.22%. Now let’s say you are considering whether to buy stock in Company XYZ or Company ABC. Company ABC has a stock price of $100 per share and an annual dividend of $4.00. We can use the dividend yield formula to figure out Company ABC’s dividend yield:
The answer is 0.04, or 4%. That means that Company ABC has a dividend yield of 4%, compared to the 2.22% dividend yield offered by Company XYZ. If maximizing your dividends is your main investing goal, then you would be better served by investing in Company ABC.
Potential Pitfalls of Dividend Yield
While knowing how to calculate dividend yield can certainly be helpful, investors might run into problems and make mistakes if they rely too heavily on the metric when deciding which stocks to invest in. Here’s what else you should take into account as you assess stocks.
For one, you want to make sure that the current high dividend yield a company boasts isn’t a fluke. Take a look at the past performance of a stock and see if the dividend yield has been consistent. Also look to see if the dividend has consistently gone up over a period of years.
Second, the dividend yield may be high because the stock recently took a huge nosedive. If a stock’s price drops from $250 per share to $100 per share in a matter of weeks without the annual dividend adjusting, the dividend yield will seem very high. However, the company clearly isn’t doing well overall, and this could mean that the dividend will be in line to drop.
Finally, look to see if the company is giving out too much of its profits in the form of dividends. Some investors like to see no more than 50% of a company’s earnings given back as dividends. If a company is paying too much in dividends, that could impact its ability to reinvest in the business and continue to grow.
The Bottom Line
Calculating dividend yield using the above formula will help you determine how much of a dividend you’ll get back for each share of a company you invest in compared to the price cost of the share. This is one way to compare stocks and see which is going to give dividend investors the best value. However, you’ll want to be careful and make sure you aren’t investing in stocks with a high dividend yield that is unsustainable.
- If you want help finding stocks with a dividend yield that you’ll find worthwhile, you may want to consider getting the help of a financial advisor. SmartAsset can help you find a suitable advisor with our free financial advisor matching service. You answer a few questions about your financial situation and goals. Then, we match you with up to three advisors in your area. We have vetted all of the advisors on our platform and ensured none have disclosures. From there, you can ask questions of each of your advisor matches to see who’s a good fit.
- Whether you’re investing in dividend stocks or not, young investors need to know that you can’t avoid risk altogether. Don’t be reckless, but don’t be so safe you that don’t see returns. This guide has more tips for millennial investors.
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