Howdy Wall St. Willy! Sometime ago when we talked about yield, you said something about dividend yield. But what is dividend yield anyway?
Dividend yield is the rate of return you get through dividend payments from a stock at its current market price. It is expressed as a percentage, just like interest rates.
Well, how is dividend yield calculated?
Dividend yield is the dividend amount divided by the prevailing market price of the stock.
Dividend Yield = Dividend Amount / Market Price of the Stock
For e.g., if the dividend payment for a stock is $5 and the current market price of the stock is $100, the dividend yield is 5/100, which is 5%.
Dividend Yield = $5 / $100 = 5%
Is the dividend yield only for stocks or can it be there for other securities too?
Dividend yield is only for stocks. Bonds do have a yield but it’s different from dividend yield.
We’ve talked about that in detail in another video.
Well, do all stocks have a dividend yield or do only some?
All stocks that pay a dividend have dividend yield but not all stocks pay a dividend.
Does dividend yield change or does it stay the same over time?
The dividend yield changes from time to time because the stock price changes frequently and the dividend amount also varies.
So, is dividend yield the rate of return I get from my stock investment?
You can make money from stock investments in 2 ways. Way number 1 is through dividends. Way number 2 is through stock price appreciation.
So, the dividend yield is only one part of the return you get and does not represent the total return you get from your stock investment.
But remember, if you already own a stock, your dividend yield depends on the price at which you bought the stock and not the current market price. Let’s say the dividend amount for a stock is $5 and you bought it at $50 and the current market price is $100. In this case, the dividend yield for you 5/50, which is 10% although the current dividend yield is only 5%.
Original Dividend Yield = $5 / $50 = 10%
Current Dividend Yield = $5 / $100 = 5%
Well, should I invest in stocks that have a high dividend yield?
Like I said before, dividend yield is only one part of the total return. So, while it is a good indicator it is not the only factor to be considered for a stock investment.
For instance, there are companies like Berkshire Hathaway that don’t pay any dividend but have shown consistent stock price appreciation over several years.
Thank you very much for telling me about dividend yield, Wall St. Willy.
You are welcome, Sooper Cooper. Remember, Finance is Your Friend!