Dividend Yield vs Dividend Rate: How to Calculate Both
A dividend is a periodic cash payment that a company pays to its shareholders out of its profits. There are two ways to calculate the income you receive from dividends: through the dividend yield or the dividend rate.
Some Background
What Is A Dividend Yield?
The dividend yield is calculated by dividing the annual dividends per share by the current market price of one share. It is expressed as a percentage. You can look at the forward yield, which is the expected yield for the next 12 months, or the reverse yield, which is the last 12 months.
What Is A Dividend Rate?
The dividend rate is the expected value of dividends to be paid over a period of time, usually quarterly or annually. It is expressed as a dollar amount and is usually stated on a per-share basis.
What Does It Mean To Me?
Both the dividend yield and the dividend rate are important metrics to understand when looking at a company’s financials. The dividend yield is a measure of how much income you will receive from your investment, while the dividend rate measures how sustainable that income stream is.
Which One Is Better?
It depends on what you are looking for in an investment. If you are looking for a stable income stream, the dividend rate is a better measure. If you are looking for a certain return on investment, dividend yield can be a better measure. The dividend yield is heavily influenced by changes in share price, so it is important to consider the yield at the point in time you purchase the stock.
Formulas And Other Fun Stuff
Dividend Yield Formula
The dividend yield formula is the annual dividends per share divided by the current share price.
The dividend yield has an inverse relationship with the share price. If the share price goes up, the dividend yield will fall and vice versa.
Dividend Rate Formula
The dividend rate formula is about as simple as it gets. You add up all of the dividends that a company has distributed, or will distribute, over a certain time period to each share of stock. And that is it.
Finding Information on Dividends
To find information on dividends, you can go straight to the company’s website and look for their SEC filings. You can also use a financial database, like Morningstar, Yahoo! Finance, Seeking Alpha, or Motley Fool.
Let’s Walk Through An Example
First, we need to visit a company’s investor page or access a financial database. For more information on finding investor pages, visit our article on Reading Financial Statements.
For this post, we will review Walmart which is #1 on the Fortune 500 as the largest company in the United States. Searching for “Walmart Investor” brings up the Walmart Investor Relations website. From there, you can navigate to financials and find all of the recent filings.
Second, we need to determine what dividends the company has paid, and what they have committed to pay if any. Not all companies release this information.
Walmart paid a $0.55 quarterly dividend per share in 2021 and committed to raising it to $0.56 in 2022. The current share price is $140.85.
With this information in hand, the last step is to calculate the dividend rate and the dividend yield.
Let’s Recap
Dividends are a great way for investors to collect income from the stock market. Investors can calculate their dividend yield or dividend rate, but it is important to understand what each one means and how they work so you know which metric will be most beneficial to your investment strategy.
Frequently Asked Questions
What Is A Good Dividend Yield?
There is no definitive answer to this question. Dividend yield can vary depending on the company and what you are looking for in an investment. Dividend yields are most commonly in the 2-4% range when offered. Higher dividends, outside steady industries like utilities, should be approached with caution. Keep in mind that dividend yield often comes at the expense of capital gains.
What Is A Good Dividend Rate?
Again, there is no one definitive answer to this question. It depends on the individual investor’s needs and goals. It also depends heavily on the stability of the dividend, the share price when purchased, and the expectation for capital gains.
Do All Stocks Pay Dividends?
No, not all stocks pay dividends. Companies like Amazon and Netflix do not currently offer dividends to their shareholders. Dividends are paid out of the company’s earnings so if a company is reinvesting heavily into the business or expanding its operations then it may choose to retain more cash instead of paying out large dividends.
Is A High Dividend Yield Good?
It can be good but does not necessarily mean that the company is doing well. This could also indicate a falling share price, as the dividend yield has an inverse relationship with share prices. If a stock’s value falls, then investors will receive more money from dividends as each dollar of earnings represents a larger portion of the share price.
What Are The Advantages Of Using Dividend Yield?
The main advantage of using dividend yield is that it is simple to calculate and understand. Additionally, it is a good metric for comparing different companies in different industries. Dividend yields can also be used as part of a screen for investments. For example, an investor might want to find all the stocks with a dividend yield higher than the S&P 500’s expected yield.
What Are The Disadvantages Of Using Dividend Yield?
The main disadvantage is that it can be misleading. It only looks at the share price as it stands today and does not take into account future growth or earnings potential. Additionally, a high yield may come from a falling share price rather than strong company performance. This could mean that there is more risk associated with buying stock in that company.
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