Wednesday, November 25, 2015

How To Calculate A Stock's Dividend Yield

When comparing different investments, the most common method used is to compare their yields. The yield of an investment is simply the return you get expressed as an annual percentage. This allows you to do a basic comparison between different types of investments. For example, suppose you are trying to decide which is the better investment: putting money in a bank account or buying a dividend paying stock. These are two very different types of investments with differing levels of risk. But suppose you are investing for the long term and your investment objective is income, i.e. cash flow. By comparing the yields of the two investments, you can tell which one gives you the better return.

Calculating Yield

Yields on savings accounts are simple. The bank flat out tells you what interest rate you will get when you deposit your money. If you go with a certificate of deposit, that rate will be locked in for a fixed period of time. A regular savings account might have a variable rate. Typical yields on savings account these days are in the 1% and lower range.

When talking about stocks, we refer to their dividend yield. As you might expect, this only applies to stocks that pay a regular dividend. A stock's dividend yield is calculated by taking the amount of money they pay out in dividends per year divided by the per share stock price. Almost all stock quote websites on the internet will provide this information for you. Here's a shot from Realty Income's quote page on Google:

I've circled the relevant section. In this case, the dividend and dividend yield are shown on the same line. Other sites might break them out onto their own lines. This is telling us that Realty Income pays out a $0.19 dividend per share. At the current share price of $49.89, that works out to a 4.58% return.

How was that calculated? In order to calculate this, you need one more piece of information that is not shown. Realty Income pays their dividend monthly. So over the course of a year, you will get $0.19 x 12 or $2.28 per share in dividends. $2.28 divided by $49.89 = 4.57%.  Why does Google show 4.58% then?

Here we get into the idiosyncrasies of dividends,particularly for Realty Income. A lot of companies that pay dividends declare them to fractions of a penny. In this case, Realty Income's actual dividend is $0.1905 per share. That translates to $2.286 per share of income and $2.286 divided by 49.89 is 4.58%.

Here's a shot of the info for Microsoft, which is a more typical dividend paying stock:

Microsoft pays their dividend quarterly, so $0.36 * 4 = $1.44. That divided by the $48.88 share price gives you a yield of 2.95%.

Using This Information

Now that we know how to get a stock's dividend yield, we can compare our two investments. A typical savings account will pay 1% or less. Realty Income is paying 4.58% and Microsoft is paying 2.95%. Seems like a no-brainer to go with Realty Income, right? Not really. Next time, I'll go into another important concept - risk.


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