Dividend yield: How to calculate it and how to use it

Julie Brownlee, Fsp Invest, 03 Apr. 2014

Tags: dividend yield, dividend, how to calculate the dividend yield, dividend yield calculator, what is the dividend yield,

If you want to invest in companies that pay dividends, you want a way of measuring how good that dividend payment is. One way to do that is to look at the share’s dividend yield. But how can you calculate the dividend yield? And how do you interpret it? Let’s take a closer look at the ins and outs of the dividend yield…

What are dividends?

Before we get into the nitty gritty of the dividend yield, here’s a quick recap on what a dividend is…

As a shareholder, a dividend is your portion of a company’s profits. A company usually pays these out twice a year when it releases its half-year and full-year results.

Now, not all companies pay out dividends. Some companies, especially young and growing firms, will opt to reinvest any profits back into the business.

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By looking at a share’s dividend yield, you can see straight away if the company pays a dividend or not. If the dividend yield is 0%, then the company pays no dividend.

So what is the dividend yield?

The dividend yield is the percentage of the share price you’ll get back in way of dividends, Gareth Stokes in Fear, Greed and the Stock Market explains.

You can calculate the dividend yield by dividing the amount paid out in dividends by the company’s share price.

Let’s run through an example…

Let’s say a company pays out R10 in dividends and is currently trading on a share price of R200. The dividend yield is 5% ((R10/R200) x 100).

If a company pays out R5 in dividends and is currently trading on a share price of R200, the dividend yield drops to 2.5%.

So the larger the dividend payment, the higher the dividend yield is.

Focusing on the highest dividend yields can have its problems. For instance, a company that’s share price is dropping may show a higher dividend yield because of this. A company with a falling share price isn’t something you want to invest in.

When looking at dividend yields, it’s a good idea to look at the overall dividend yield of the market and the sector the share you’re interested in is trading.

So there you have it, how to calculate the dividend yield and how to use it.

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