Dividend yield tells you the value of a company’s annual dividend payment as a percentage of its stock price. Forbes Advisor’s dividend yield calculator helps you factor a given company’s dividend yield, taking into account share price, dividend frequency and dividend payment amount.
Dividend Yield Calculator Definitions
- Dividend Amount. The dollar amount of a company’s recurring dividend.
- Dividend Frequency. The frequency with which the dividends are paid.
- Share Price. The price at which a single share of the company’s stock currently trades.
What Is a Dividend?
Dividends are a portion of a company’s profits that it returns to shareholders. Dividends are offered to investors to reward them for owning shares of the company, and also to distribute excess cash that isn’t being reinvested back into the company. Not all companies pay dividends.
Investors should be aware that, unlike with the interest payments on a bond, dividend payments are not guaranteed. A company can choose to cut or eliminate its dividend whenever it thinks that might be necessary for the health of the company or its shareholders.
What Is Dividend Yield?
Dividend yield is the percentage of annual return in dividends on each dollar invested in the company. For example, if a company trades for $200 per share and that company pays a $2 annual dividend, then the company offers a 1% dividend yield.
It’s important for investors to keep in mind that dividend yields are in constant flux. This is because a given stock’s dividend yield relies not only on the price of the projected dividend but also on the company’s current share price.
Why Do You Need to Know a Stock’s Dividend Yield?
Calculating a stock’s dividend yield is an important part of knowing the overall value of the stock. It shows how much money per dollar invested you can expect to receive back from the company in dividends.
This is helpful when it comes to compounding your investments. Compounding is when you reinvest the money earned from your investment back into the initial investment. It increases the amount of principal on which you’re earning returns without investing any more additional money.
Up to a certain point, companies with increasing dividend yields tend to be healthier investments than ones with decreasing yields. However, if a stock’s yield is increasing too rapidly, that could be a dangerous sign for the company’s overall health.
For this reason, investors might want to make sure that the company’s dividend yield has maintained a steady trajectory over the past few years. This is a good sign of steady company growth rather than a precipitous drop in overall stock price.
How to Calculate Dividend Yield
To calculate a stock’s dividend yield, all you need to do is divide the stock’s annual dividend by its current share price. This value gives you the amount of money the stock’s dividend pays out on every dollar invested in the stock.
For example, if a given stock—trading at $125 per share—pays a quarterly dividend of 75 cents per share, this means the stock’s annual dividend is $3 per share. To discover the stock’s dividend yield, divide the $3 annual dividend by $125. This gives you a dividend yield for that stock of 2.4%.
Frequently Asked Questions (FAQs)
Do all stocks pay dividends?
No, not all stocks pay dividends. Some of the best dividend paying stocks are more established companies in industries like telecommunications, utilities, consumer staples, energy and real estate.
What is a “yield trap?”
A yield trap is when a stock’s high dividend yield doesn’t offer any advantages. This can be due to multiple factors, but one way it happens is if a company’s stock price falls faster than its earnings. The falling share price could make the company’s dividend payouts appear more lucrative than they actually are since the company’s failing earnings might also mean the company will soon cut its dividend.
If you buy the company at this low price and the company does cut its dividend, not only have you bought a failing stock, you also have a lower dividend yield, which means you’re earning less on every dollar you’ve invested.
Do share prices affect dividend yield?
Yes, a company’s stock price affects its dividend yield. For example, if a company’s stock price rises and its dividend payment remains the same, then the yield will appear lower. However, if a company’s stock price drops and the yield remains the same, then the yield will appear higher.
Are higher dividend yields better?
Higher dividend yields are not always better. If a company’s stock price has dropped but its dividend payment remains the same, the yield will appear higher. However, this doesn’t mean that the company is a healthy investment. In fact, in some instances, a rising dividend yield could be the sign of a struggling company.
