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What Is Dividend Yield?

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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.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Investing involves risk including loss of principal.

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