How to calculate dividend yield (and why it matters)
By Indeed Editorial Team
Published 8 June 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Dividends are a proportion of a company's income that it voluntarily returns to shareholders, generally on a monthly, quarterly or annual basis. Earning dividends is one way that investors can make money through their investments without selling their stock. Calculating how much you can expect to receive in dividends each year is a good way to determine whether a company is a sound investment choice. In this article, we provide definitions of the key terms, explain how to calculate dividend yield and share some examples of calculating dividend yield in practice to help further your understanding.
How to calculate dividend yield
If you want to learn how to calculate dividend yield, it's important to first understand the following terms:
Yield: In finance, a yield is an income that an investor makes from their investments and is usually in the form of either interest or dividends. This income means that the investor can make money without selling their stock.
Dividend: A dividend is the amount of a company's profits that it chooses to return to its investors according to how much stock they own in the company. Dividends are usually paid either monthly, quarterly, semi-annually or annually.
Market value per share: A company's market value per share is the cost of one share of the company in the current market. For example, if the cost per share of a company is £0.50 and you owned 1,000 shares, you would own £500 worth of shares in that company.
How to calculate dividend yield in four steps
To calculate the dividend yield on a particular investment, follow the steps below:
1. Find out the annual dividend per share
The first step in calculating the dividend yield is to find out the dividend per share. If the company pays out dividends quarterly, you can take the last dividend payout and multiply it by four. Naturally, if the company pays dividends monthly, you would multiply the monthly amount by 12 to get the annual figure.
For example, if Big Tech Company paid out £0.50 per share each quarter, you would multiply that by four to get an annual dividend figure of £2. This means that an investor with 2,000 shares would have earned £1,000 in dividends that year (0.5 × 2000 = 1000).
You can usually find a company's annual dividend payouts in its annual report.
2. Determine the market value per share
The next step is the determine the company's market value per share. A company's share price can fluctuate frequently according to supply and demand, so if more people are trying to buy the stock than sell it, the price is likely to rise. Since the figure changes quickly, it's important to do this calculation regularly to make sure the dividend yield figure you have is accurate and up to date.
For the purposes of our example, let's say that Big Tech Company's price per share is £80.
3. Do the calculation
Once you've gathered the figures above, you can input them into the formula to get the dividend yield. This can give you an idea of whether it's a good idea to buy stock in this company. To continue the example:
For Big Tech Company we would divide the £2 dividend per share by the market price by share of £80. This would give us a dividend yield of 0.025.
4. Turn it into a percentage
Dividend yield is most often expressed as a percentage. This can make it easier to understand and to compare the figure with the dividend yield of other companies. To turn the figure into a percentage, simply multiply it by 100:
In this example, you multiply the 0.025 by 100 and get a dividend share of 2.5%. This means that an investor can expect an annual return of 2.5% in dividends on their investment at Big Tech Company.
Examples of calculating dividend yield
Here are some examples of dividend yield calculations to help you further understand the concept:
A company, ECP Electronics, trades at a price per share of £50. Throughout the year, the company pays dividends of £0.50 per share to its shareholders every quarter. To get the annual dividend figure, we multiply £0.50 by four and get a total of £2, meaning that each shareholder receives £2 in dividends each year for every share they own. If we divide the annual dividend per share by the market price per share, we get a dividend yield of 0.04, which we can then multiply by 100 to determine an annual return of 4%.
Plastics UK's stock currently sells for £90 per share. Throughout the year, the company pays its shareholders £6 per share every quarter. We can work out the annual dividends by multiplying this by four, to get £24 per share annually. We can then calculate the dividend yield by dividing this figure by the price per share of £90. This gives us a dividend yield of 0.27, or 27% when expressed as a percentage.
Another company, The Big Tech Company, trades at a market price of £45 per share. Each month, it pays dividends of £0.30 per share to its stakeholders. In this case, we multiply the monthly dividends by 12 to get the annual figure of £3.60 per share annually. We then divide this figure by the £45 price per share, to calculate a dividend yield of 0.08, or 8%.
If an investor was considering buying stock in one of these companies, Plastics UK would be the most attractive option in terms of dividend yield, followed by Big Tech Company and then ECP Electronics.
Why calculate dividend yield?
Dividend yield is one factor to consider when deciding whether a company is a good choice to invest in. Here are some advantages of calculating dividend yield:
Makes it easy to compare stocks
If you're an investor, it's important to evaluate which stocks are likely to give you a bigger yield, including through dividends. Calculating the dividend yield of a company is more useful than just using the amount you can expect to receive in dividends since the cost of companies' stock can vary widely. Doing the calculation makes it easier to compare companies even when their stock prices are different.
Indicates the company's financial health
If a company chooses to increase its dividends, this generally means that it's doing well financially since it can afford to return more of its profits to shareholders instead of reinvesting them in the company. This means that it can be useful to look at a company's dividend yield over the past few years to see whether it has increased. Typically, companies that offer a higher dividend yield are large, established businesses in stable industries.
Related: How to become an investment banker
Disadvantages of dividend yield
While a company's dividend yield can be a useful figure to know, it doesn't tell you everything about a company and can sometimes even be misleading. There are some situations when a high dividend yield might even be a warning sign, even if it initially looks positive. For example:
When stock price has recently dropped
If a stock's price has recently decreased significantly in price and its dividend has not yet been dropped accordingly, the dividend yield can seem high. For example, imagine a company that pays an annual dividend of £2 per share, whose stock sells for £50 per share. If the stock price fell to £30, the dividend yield would go from 4% to 6%, representing a 50% increase. While this may seem like a good rate, in this case, it would be likely that a dividend reduction or elimination may follow soon, since the company is likely in financial trouble.
When a company is trying to attract investors
Some companies may pay out a high dividend yield in the hope of attracting more shareholders. If the high dividends mean more people buy the company's stock, the price per share is likely to increase. If the company isn't financially stable, the high dividend yield (and the high stock price) may not last.
Stocks with high dividends
Not all stocks yield dividends and they're more common in some industries than others. If you want to be sure of receiving a high dividend yield, you can look for so-called 'dividend aristocrats', which are companies that have consistently increased their dividends over several years. Another good idea is to look for stock in the following industries, which tend to have stable (and high) dividend yields:
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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