Delving into dividends: How to use the dividend yield and the dividend pay-out ratio

Julie Brownlee, Fsp Invest, 26 Mar. 2015

Tags: dividends, dividend yield, dividend pay-out ratio, dividend, how to compare dividends, how to weigh up dividends, finding good dividends,

If you want to invest in shares for an income, you’ll concentrate on the top dividend paying companies listed on the Johannesburg Stock Exchange.

So how can you weigh up the dividends a company pays out? You can use two different calculations: The dividend yield and the dividend pay-out ratio.

Let’s take a closer look at how to use them…

Compare different companies’ dividends by using the dividend yield

A great way to weigh up the different dividends companies pay is to look at the dividend yield.

The dividend yield is the percentage return you’ll get on a particular share for the price you pay for it.

Here’s how to calculate the dividend yield:

Dividend yield = Dividends per share / price of the share

For example, if a company is trading at 100c and it pays a 5c dividend, its dividend yield is 5%.

You’ll find that dividend yields vary from sector to sector. At the moment, the JSE All Share Index is sitting on a dividend yield of around 2.85%.

How to check how generous a company’s dividend payment is

The dividend pay-out ratio measures how generous or stingy a company is with its cash.

Here’s how to calculate the dividend pay-out ratio:

Dividend pay-out ratio = Dividends per share / earnings per share

A company will decide how much of its earnings to pay out to shareholders depending on a number of factors.

You want to see a company maintaining and growing its dividends over time if you’re investing for income. And you can use the dividend pay-out ratio to gauge this.

A company will retain some of its earnings to invest back into the business and promote growth. A company paying all of its earnings back to shareholders could be a warning sign.

So there you have it. How to use the dividend yield and the dividend pay-out ratio.

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