What is a Dividend?
Dividends are payments from a company’s profits made to shareholders. Dividends are a component of total return—an investor benefits from stock price appreciation and the dividend payment. Consequently, the predicted total return is comprised of both factors. It is impossible to calculate stock price gains or losses ahead of time. But an investor can calculate dividend yield from the annual dividend rate and the stock price.
Companies pay dividends as a percentage of profits after using cash flow to reinvest in the business and pay down debt. Dividends are usually paid quarterly in the United States. Although some net lease REITs pay monthly dividends, and a few companies pay bi-annual or annual dividends. In other countries, bi-annual or yearly dividends are more common. Some companies will also pay special or one-time dividends or a stock dividend. Companies that increase their dividend annually are known as dividend growth stocks.
Companies may cut or omit dividends during recessions or due to poor operating performance.
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What is Dividend Yield?
The dividend yield is a way of expressing an annual dividend payment as a percentage of the stock price. Because they are inversely related, the dividend yield fluctuates as the stock price varies. Dividends are paid on a per share basis. Hence, the more shares an investor owns, the greater the total dollars received. For example, if a stock pays a 3% annual dividend yield, it will pay $30 for every $1,000 owned by an investor.
How to Calculate Dividend Yield?
To calculate the dividend yield, you need to dividend the annual dividend payment by the current stock price. The dividend yield formula is,
For example, if the stock price is $50 and the annual dividend per share is $2.00, the dividend yield formula is written as,
The annual dividend yield in this example is 4%.
The annual dividend payment can be found on many financial and company websites. When only the quarterly dividend payment is provided, multiply by four to determine the annual dividend per share.
Calculating Forward Dividend Yield
Two variations of the dividend yield exist. The forward dividend yield is based on the current quarterly dividend payment multiplied by four for the next four quarters. This percentage is helpful in knowing future dividend payments. The trailing twelve months (TTM) dividend yield is based on the actual payments in the past four quarters.
For instance, the table below shows the date and quarterly dividend payment for Coca-Cola (KO). The company is a well-known Dividend King and Dividend Aristocrat. Coca-Cola increased the dividend on February 17, 2022, to $0.44 from $0.42 per share.
|Quarterly Dividend Rate
|December 15, 2021
|April 1, 2022
|July 1, 2022
|October 3, 2022
Coca-Cola’s current stock price is $55.84 per share. Thus, the trailing annual dividend is $1.74 per share, giving a Dividend Yield (TTM) of 3.12%. The forward annual dividend rate is $1.76 per share, giving a Dividend Yield (FWD) of 3.15%. So, suppose an investor owns $1,000 stock; they expect to receive approximately $31.50 in annual dividend payments in the coming 12 months.
Dividend yield makes it easy to compare income stocks. After calculating dividend yield, investors can compare them to know which ones will pay more income. The actual dividend rate is not helpful because of varying stock prices. An investor desiring to live off dividends wants to know the passive income stream from each stock based on dividend yield.
For example, suppose Company A pays an annual dividend of $2.00 per share, and the stock price is $50; the dividend yield is 4%. Now, suppose Company B pays an annual dividend of $3.00 per share, and the stock price is $100; the dividend yield is 3%. All else being equal, an income investor would probably want Company A.
The dividend yield may also be used to determine valuation. For example, a stock may be undervalued if the dividend yield exceeds the historical average. Likewise, a stock may be overvalued if the dividend yield is less than the historical average. However, investors are cautioned to check other valuation metrics, like the price-to-earnings ratio.
However, one warning is that a stock with too high dividend yields is often distressed. For example, the company’s stock price may have fallen because of poor results inflating the dividend yield. Alternatively, the firm’s dividend policy may be too generous. Similarly, a high dividend yield may not signify a rapidly growing company. Conversely, many companies have low dividend yields but are quickly growing, making them desirable to own because of potential stock price appreciation.
Final Thoughts on How to Calculate Dividend Yield
Knowing how to calculate dividend yield is valuable for understanding dividends and comparing income stocks. In addition, information about stocks is readily available on most investing or company websites. The formula is simple to understand, and the calculation is easy, allowing investors to determine yield quickly.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.