What Is Dividend Yield?

Charles Schwab

10 Nov 202301:23

Summary

TLDRThe dividend yield, calculated by dividing the dividend per share by the stock price, is a key metric for investors to gauge investment returns. Despite a higher yield indicating a more attractive investment, it's essential to consider the company's health and dividend consistency. Investors should seek established firms with a track record of stable earnings and growing dividends for a reliable dividend yield.

Takeaways

📊 Dividend yield is a financial ratio that indicates the return on investment from dividends relative to the price per share.
💡 To calculate dividend yield, divide the expected dividend income by the stock's price per share.
🔢 Example: For stocks paying $1 dividend per share, a $30 stock has a 3.3% yield, while a $20 stock has a 5% yield.
📈 A higher dividend yield suggests a higher return on investment, but it's not the sole indicator of a good investment.
📉 A rising share price can lead to a decrease in dividend yield despite stable or increasing dividends.
⬇️ Conversely, a falling share price can increase the dividend yield, which might indicate financial distress.
⚠️ High dividend yields at struggling companies could be a sign of potential dividend cuts or cancellations.
🏭 Investors should consider the stability and growth of a company's earnings and dividends, not just the yield.
🔎 Understanding the factors driving the dividend yield is crucial for investors seeking stable income.
📈 Established companies with a history of consistent earnings and growing dividends are often more reliable for stable yields.

Q & A

What is dividend yield?
-Dividend yield is a financial ratio that indicates the annual dividend income an investor receives for holding a particular stock, expressed as a percentage of the stock's price per share.
How is dividend yield calculated?
-Dividend yield is calculated by dividing the expected annual dividend payment by the stock's current price per share.
Why is dividend yield important for investors?
-Dividend yield is important for investors as it helps them understand the return they are getting on their investment in terms of dividends relative to the stock's price.
What does a higher dividend yield indicate about a company?
-A higher dividend yield might indicate a better investment opportunity as it shows a higher return on investment. However, it could also suggest that the company's share price has fallen or that the dividend might be at risk.
How can a company's dividend yield change over time?
-A company's dividend yield can change over time due to fluctuations in the stock price, changes in the dividend payout, or a combination of both.
What is the relationship between a company's health and its dividend yield?
-A healthy company may have a lower dividend yield if its share price is high due to increased investor interest. Conversely, a distressed company may have a higher dividend yield if its share price is falling while dividends remain constant.
Why might a company's dividend yield increase?
-A company's dividend yield might increase if its share price declines, if the dividend remains constant or increases, or due to a combination of these factors.
What should investors consider when evaluating a company's dividend yield?
-Investors should consider the company's financial health, history of earnings, consistency of dividend payments, and the potential for future dividend growth when evaluating a company's dividend yield.
How can an investor determine if a company's dividend yield is sustainable?
-An investor can determine if a company's dividend yield is sustainable by analyzing the company's financial statements, payout ratio, and the stability of its earnings.
What are the potential risks associated with investing in a company with a high dividend yield?
-Investing in a company with a high dividend yield may carry risks such as potential dividend cuts, reduced future growth prospects, or the company being in financial distress.
Why might a company's board reduce or cancel its dividend payments?
-A company's board might reduce or cancel dividend payments if the company is facing financial difficulties, needs to conserve cash for operations or investments, or if the dividend yield is unsustainable given the company's earnings.

Outlines

00:00

💹 Understanding Dividend Yield

Dividend yield is a financial ratio that indicates the return on investment for shareholders who receive dividends. It is calculated by dividing the expected dividend per share by the stock's price per share. The example in the paragraph illustrates how two companies with the same dividend payout of $1 per share can have different dividend yields based on their stock prices. The first company, with a stock price of $30, has a dividend yield of 3.3%, while the second, priced at $20, offers a 5% yield. However, the paragraph cautions that a higher yield does not necessarily mean a better investment, as it could indicate a company in distress with a falling stock price. Conversely, a stable company might see its yield decrease as its stock price increases. Investors are advised to consider the underlying reasons for the dividend yield and to focus on established companies with a track record of consistent earnings and growing dividends.

Mindmap

Keywords

💡Dividend Yield

Dividend yield is a financial ratio that measures the return on investment from dividends relative to the price of a share. It is calculated by dividing the annual dividend payment by the price per share. In the video, dividend yield is discussed as a key factor for investors to assess the return they are receiving on their investment, with examples showing how it can vary between companies.

💡Dividend

A dividend is a portion of a company's earnings that is paid to shareholders, usually on a regular basis. It represents a reward for investing in the company. The video emphasizes that dividend payments can impact the dividend yield, and the stability of dividends is crucial for evaluating an investment's potential return.

💡Stock Price

The stock price is the current price at which a share of a company is traded on the market. It is a crucial element in calculating the dividend yield. The video illustrates how the stock price affects the dividend yield, with lower stock prices leading to higher yields, and higher stock prices resulting in lower yields.

💡Return on Investment (ROI)

Return on Investment (ROI) is a measure used to evaluate the efficiency or profitability of an investment. In the context of the video, dividend yield is one way to assess the ROI by showing the percentage return from dividends relative to the price of the stock.

💡Distressed Company

A distressed company is a business that is struggling financially, often indicated by a falling share price. The video mentions that such companies might still offer high dividend yields due to declining stock prices, but these dividends are at risk of being reduced or canceled, signaling potential instability.

💡Established Companies

Established companies are firms with a long history of stable operations, consistent earnings, and regular dividend payments. The video advises investors to focus on such companies when seeking reliable dividend yields, as they are more likely to continue paying and possibly increasing their dividends.

💡Earnings

Earnings refer to the profits a company generates, which can be used to pay dividends to shareholders. The video suggests that consistent earnings are an indicator of a company's ability to maintain or grow its dividend payments, which is important for a stable dividend yield.

💡Dividend Increase

A dividend increase occurs when a company raises the amount of money it pays out in dividends to its shareholders. The video mentions that anticipation of a dividend increase can attract more investors, leading to a rise in the stock price and a subsequent decrease in dividend yield.

💡Dividend Reduction

Dividend reduction is when a company lowers the amount of money it pays out in dividends. The video warns that companies with high dividend yields due to falling stock prices might reduce or cancel dividends, which is a risk investors should consider.

💡Investor Sentiment

Investor sentiment refers to the overall attitude of investors toward a particular security or financial market. In the video, it is implied that positive sentiment towards a healthy company can drive up its stock price, thereby lowering its dividend yield, while negative sentiment can have the opposite effect.

Highlights

Dividend yield is a key ratio for investors to gauge returns on investment.

It is calculated by dividing the dividend per share by the stock's price per share.

A company with a $1 dividend and a $30 stock price has a 3.3% dividend yield.

Another company with the same $1 dividend but a $20 stock price offers a 5% yield.

A higher dividend yield suggests a better investment in terms of return.

However, a high yield doesn't always indicate a healthy company.

Investor interest can inflate share prices, reducing dividend yields before a dividend increase.

A distressed company might show a high yield due to a falling share price.

An increased dividend yield at a distressed company could signal potential dividend cuts or cancellations.

Investors should look for stable dividend yields and understand the factors driving them.

Established companies with consistent earnings and growing dividends are preferred for stable yields.

Dividend yield is just one of several measures investors use to evaluate investments.

The relationship between dividend yield and company health is complex and requires careful analysis.

Investors should consider both the current yield and the company's financial stability.

A high dividend yield can be attractive, but it's essential to consider the sustainability of dividends.

The market's perception of a company can significantly influence its dividend yield.

Consistent earnings are crucial for maintaining and growing dividend payments.

Investors should be cautious of high yields that may not be supported by strong financials.