Dividend yield is the ratio of annual dividends per share to the price per share. This financial ratio shows the total amount of dividends a company pays per year. Generally, dividend yield is a calculation of an investment’s return in terms of dividends. Whether the dividend increases or decreases, yield will increase if the stock price drops. Conversely, yield will decrease once the price rise up.
As the yield depends on the stock price, dividend yields are often strangely high for stocks that drop its value rapidly. Furthermore, small new companies that are still growing often pay a lesser dividend than developed firms. That is, developed firms which aren’t progressing rapidly pay large dividend yields.
The same principle applies to all sectors. Lets take an example of technology sector. By 07 May, 2020, Qualcomm had a TTM(Trailing Twelve Months) dividend of $2.48. Considering its present price of $78.83, the dividend yield could be 3.15%. In the meantime, Square, Inc. being a newer company pays no dividends at all.
Generally, average dividend yield is very high among Real Estate Investment Trusts, Master Limited Partnerships and Business Development Companies. In the case of these companies, the US treasury wants them to hand on most of their earnings to their shareholders. This is known as pass-through process. This way, the firm doesn’t have to pay taxes on gains, allocated as dividends. But, the shareholders have to consider these payments as ordinary income and should pay taxes for them.
CALCULATION OF DIVIDEND YIELD
Dividend yield= Annual dividends per share/ Price per share
Dividend yields can be determined from a full year’s financial report. However, this is only sustainable for the first couple of months as the data will lose its relevance if it stays longer from the annual report. On the other hand, investors can add the final 4 quarters of dividend that shows the TTM of the data. As dividends are paid quarterly, many traders will take 4 times the last quarterly dividend and apply it as annual dividend for yield calculation. This process will display any latest changes in the dividend. But, not all companies pay quarterly dividends. Some firms pay dividends more often than quarterly. Monthly dividends could give a low yield calculation. While considering the calculation, you should analyze the payment history of dividends to identify the suitable method for the precise result.
- Concentrating on dividends could amplify the returns.
- Dividend yield stocks are much less riskier than non-dividend stocks.
- In the hands of investors, dividends are tax-free. Therefore, dividend yield stocks are systematic tax saving assets.
- Dividend data can be often misleading or based on old information.
- Higher dividend yields does not always mean that the firm is doing well. Some developed firms pay higher dividends because they don’t have other profitable opportunities. Therefore, other criteria should also be used for the analysis.
Investors should not consider dividend yield alone for the analysis of a company. Be sure to analyze the dividends of a company over an extended time period. Take decisions only when you are agreeable with the consistency of the company.