StashLearn
Get the app
Get the app

Join millions of investors on Stash

Investing, simplified

Start today with as little as $5
Get the app
Teach Me

What’s Dividend Yield All About?

September 16, 2019
hand writing on notebook with pen

Tip of the Week

Consider the dividend yield before purchasing a company’s stock

3 min read

We’ve said it before, but we’ll say it again: Before you purchase any stock, it’s important to do some research. But what should you look for? There are lots of different numbers to help you understand a company’s operations, such as revenue, profit, and losses. We’ve explained P/E ratio, which can help you determine a company’s value relative to other companies in its industry.

Another important metric to consider is something called the dividend yield. It can help you measure how much cash you’ll get back in dividends for every dollar you invest in the company.

Many of the best-known and largest public companies in the U.S. pay dividends, and if you invest in them, dividends become part of your earnings.  In fact, going back to 1962, 82% of total returns for the S&P 500 can be attributed to reinvested dividends, according to recent research.

Jargon Hack

What is a dividend yield?

Dividend Yield

A mathematical formula that measures a company’s annual dividend payment compared to its share price.

Find out

Here’s an example of what the formula looks like:

*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy

Tactics and considerations

Examples

We love our imaginary widget maker Acme Co.

1-Let’s say Acme pays an annual dividend of $1. It’s current stock price is $30 a share. Its dividend yield would be 3.3%.

1/30=.033, or 0.033X100=3.3%

2-Now let’s say Acme continues to pay an annual dividend of $1, but it’s share price goes up to $40. It’s dividend yield will decrease, to 2.5%.

1/40=0.025, or 0.025×100= 2.5%

3-Acme encounters trouble and its stock falls to $20, but it keeps its dividend the same, at $1. It’s dividend would actually increase to 5%. In that case, the higher dividend yield could be deceiving, because the stock has fallen.

1/20=0.05, or 0.05X100=5%

4-Acme has a great year and its stock increases to $60 a share. It also increases its annual dividend to $6. Its yield would be 10%, possibly a good deal when you consider the increasing stock price and dividend.

6/60=0.1, or 0.1×100=10%

No one can predict the future, but by looking at a company’s stock price and dividend yield it can help you understand a company’s performance, and how your return will be affected by dividend payments. Used in conjunction with the P/E ratio and other earnings numbers, you can begin to have a better picture of a company and its performance before you invest.

Investing, simplified.

Start today with as little as $5.

Get the App

Believe in an industry?

You can invest in it and many more!

See options on Stash!

Believe in an industry?

You can invest in it and many more!

See options on Stash!

 

By Stash Team

Investment Profile

Bonds Worldwide

An International Bond ETF on Stash

Learn more
Explore more articlesChoose a topic to learn more about
pop culture market news Careers social media Retirement
Disclaimers

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.