If you invest in stocks, you may receive some dividends, which are payments made to shareholders in correlation with how the stock is performing on the market. To see if you’re getting a good dividend in comparison to other stocks, you’ll need to learn how to calculate dividend yield. Dividend yield is a formula-based expression comparing the price of a company’s stock to the dividend it pays. It’s fairly simple to figure out, and knowing the dividend yield for a company you own can help you better compare it to other stocks.
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Understanding 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.
What Is the Dividend Yield Formula?
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. All you have to do is divide the annual dividend by the current stock price, and you’ll get the dividend yield.
Here’s the dividend yield formula in simple terms:
Dividend Yield = Annual Dividends Per Share ÷ Current Share Price
Here’s an example of how to calculate dividend yield. Let’s say that the annual dividend per share for Company A is $6, and its current share price is $270. When we plug these numbers into the formula, it looks like this:
$6 ÷ $270 = 0.0222
Put into percentage terms, this means the dividend yield for Company A is 2.22%.
Dividend Yield Example
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 dividends.
In the above section, we see that Company A has a dividend yield of 2.22%. Now let’s say you’re considering whether to buy stock in Company A or Company B.
Company B, by comparison, has a stock price of $100 per share and an annual dividend of $4 per share. We can then use the dividend yield formula to figure out Company B’s dividend yield:
$4 ÷ $100 = 0.04
Company B’s dividend yield comes out 0.04, or 4%. As a result, Company B’s 4% dividend yield beats out the 2.22% dividend yield offered by Company A. So if maximizing your dividends is your main investing goal, then you’d be better off investing in Company B’s stock.
Potential Issues With 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.
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. Watch out for situations like this, as dividend yield rates that are exceptionally high are usually unsustainable.
- If you have questions about how to find stocks with a strong dividend yield, you may want some help from a financial advisor. Luckily, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool can match you with up to three financial advisors in your area in less than five minutes. Get started now.
- 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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