Want to know how much cash flow you’re getting for every dollar you’ve invested in a company? For companies that pay dividends, the Dividend Yield can give you an idea how a company’s dividend payments relate to its stock price.
Dividend yield is a ratio, and one of several measures that helps investors understand how much return they are getting on their investment.
For companies that pay a dividend, you can calculate dividend yield by dividing the expected income (the dividend) by what you invest (the price per share).
Take two companies that both pay $1 per share. One’s stock price is at $30, and the other at $20. The first company’s dividend yield is 3.3%, and the other’s is 5%. The company with the higher yield looks like a better investment, because it shows a 5% return. HOWEVER, a healthy company may attract more investors, pushing the share price up ahead of a dividend increase, which would lower the dividend yield.
At a distressed company with a falling share price but unchanged dividends, the dividend yield would go up. But that dividend payment might soon be reduced or even canceled by the board.
Investors looking for a stable dividend yield should understand what is driving the yield, and focus on established companies with a history of both consistent earnings and growing dividends.