Dividend Yield
A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:
Investopedia Commentary
Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable, dividend yields.
For example, if two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his/her income would likely prefer ABC's stock over that of XYZ.
Related Links
How Dividends Work For Investors
The Importance of Dividends
How and Why Do Companies Pay Dividends?
See also: Cum Dividend, Current Yield, Declaration Date, Dividend, Ex-Date, Ex-Dividend, Holder of Record, Return on Capital Gains, Return On Investment - ROI
dividend yield
Case Study While dividend yield can be an important measure of the current income you are likely to receive from ownership of a particular common stock, it can also signal other possibilities, some of which aren't so good. For example, a very high dividend yield is almost certainly a sign that the dividend being paid is likely to be reduced or even eliminated. In the summer of 1996, Northeast Utilities was facing rising expenses as a result of shutting a nuclear power plant located in Connecticut. The firm's stock price, reflecting investor concern about the escalating costs, had declined 50% since the beginning of the year. The reduced stock price of $12 7/8 produced a dividend yield of 13.7% based on the utility's quarterly dividend of 44¢ per share. The high dividend yield stemmed from investors' expectations that the dividend would have to be reduced, perhaps substantially, because of lower earnings and cash flow related to the troubled nuclear plant. A common stock that has a dividend yield higher than the yield on long-term bonds indicates a need for caution. |