Dividend Yield
What Is Dividend Yield?
Dividend yield is the percentage of a company's current stock price that they pay to their stockholders (per share) in dividends every year. All in all, it is the ratio of dividends paid to stock price.
Since stock price fills in as the divisor in this measurement, and stock price changes continually, dividend yield is dynamic — it changes constantly. As a stock's price goes up, its dividend yield goes down, and as a stock's price goes down, its dividend yield goes up.
How Is Dividend Yield Calculated?
Dividend yield is calculated by adding up the total dividends a company paid per share throughout the span of the last year, then, at that point, partitioning this sum by its current stock price. The subsequent number is a decimal that is ordinarily communicated as a percentage.
Dividend Yield Formula
DY = All Dividends Paid in the Last Year/Current Stock Price
Dividend Yield Example: AT&T (NYSE: T)
Throughout the span of 2020, AT&T paid dividends of $0.52 to its shareholders quarterly. This means that altogether, they paid $2.08 per share that year. As of December 31st, 2020, AT&T's stock closed at $28.76. So what was AT&T's dividend yield as of December 31st, 2020?
Dividend Yield = Dividends Paid Over Last Year/Stock Price
DY = (0.52 * 4)/28.76
DY = 2.08/28.76
DY = 0.072
DY = 7.2%
Is a High Dividend Yield Good?
For investors seeking passive income via dividend payments, a high dividend yield is certainly something worth being thankful for. This is particularly true at companies whose stock costs are moderately stable or are trending vertically over the long haul.
That being said, dividend yield can increase essentially due to a stock losing value, which isn't really a decent sign with regards to the strength of the stock itself. Dividend yields that are both somewhat high and generally stable are the best for investors who wish to receive normal dividend payments while likewise watching their portfolio increase in value over the long run.
Since it doesn't depend on a continually evolving denominator, the dividend payout ratio (which compares dividends to total earnings) might be a better check of the degree to which a company focuses on dividend payment.
What Is a Good Dividend Yield?
Average dividend yield fluctuates a lot by industry, so what qualifies as a "great" dividend yield for one type of stock could really be a moderately low dividend yield for one more type of stock. That being said, dividend yields most frequently fall somewhere close to 0.3% and 6% excepting volatility in any underlying stock.
What Types of Stocks Have the Highest Dividend Yields?
Dividend yields change fiercely by industry (and by company inside every industry), except as a rule, the following industries are remembered to have generally high average dividend yields.
- Utility companies
- Telecommunications companies
- Energy companies
- Compound companies
- Regional and money center banks
- Real estate investment trusts
Average Dividend Yields by Industry (Jan. 2022)
| Industry/Sector | Average Dividend Yield |
|---|---|
| Money center banks | 2.09% |
| Regional banks | 2.04% |
| Chemical industry | 3.54% |
| Coal energy | 0.08% |
| Telecommunications services | 6.03 |
| Tobacco industry | 5.89% |
| Utilities | 2.93% |
Highlights
- Investors genuinely should keep as a main priority that higher dividend yields don't necessarily show alluring investment opportunities on the grounds that the dividend yield of a stock might be raised as the consequence of a declining stock price.
- The dividend yield — showed as a percentage — is the amount of money a company pays shareholders for claiming a share of its stock separated by its current stock price.
- Real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs) pay higher than average dividends; be that as it may, the dividends from these companies are charged at a higher rate.
- Companies in the utility and consumer staple industries frequently having higher dividend yields.
- Mature companies are the probably going to pay dividends.
FAQ
What Does the Dividend Yield Tell You?
The dividend yield is a financial ratio that lets you know the percentage of a company's share price that it pays out in dividends every year. For instance, in the event that a company has a $20 share price and pays a dividend of $1 each year, its dividend yield would be 5%. In the event that a company's dividend yield has been consistently expanding, this could be on the grounds that they are expanding their dividend, in light of the fact that their share price is declining, or both. Contingent upon the conditions, this might be viewed as either a positive or a negative sign by investors.
Why Is Dividend Yield Important?
A few investors, like retired people, are intensely dependent on dividends for their income. For these investors, the dividend yield of their portfolio could seriously affect their personal finances, making it vital for these investors to choose dividend-paying companies with long histories and clear financial strength. For different investors, dividend yield might be less critical, for example, for more youthful investors who are more intrigued by growth companies that can hold their earnings and use them to finance their growth.
Is a High Dividend Yield Good?
Yield-situated investors will generally search for companies that offer high dividend yields, yet it is important to dig further to comprehend the conditions leading to the high yield. One approach taken by investors is to zero in on companies that have a long history of keeping up with or raising their dividends, while likewise confirming that those companies have the underlying financial strength to keep paying dividends well into what's in store. To do as such, investors can allude to different metrics, for example, the current ratio and the dividend payout ratio.
