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What’s Dividend Yield All About?

September 16, 2019
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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


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. Its 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. Its dividend yield 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.

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By Stash Team

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