How to Calculate Dividend Yield

Through stock market investments, it is possible to collect thousands of dollars in dividend payments each year. With this money, you can pay bills, purchase big-ticket items, or reinvest cash back into the market to generate additional wealth. To plan your budget, it is critical that you become familiar with the concept of dividend yield. A dividend yield is similar to an interest rate, as it calculates an expected amount of investment income upon a principal sum.

How to Calculate Dividend Yield: Define Dividends

Corporations generally pay out dividends out of business profits on a quarterly basis. You must buy and hold shares of stock prior to and through the ex-dividend date in order to receive dividends on the next payable date. The dividend payable date usually falls one month after the ex-dividend date. For dividend quotes and scheduling information, you will visit a corporation’s official website and click on its investor relations tab.

How to Calculate Dividend Yield: Calculations

Again, a dividend yield is similar to an interest rate, as it gauges the amount of income that you can expect to generate from one lump sum. To calculate dividend yield, you will divide a corporation’s expected annual dividend by its current share price and take that number as a percentage. For example, Oil Company X pays out a $1.25 quarterly dividend while trading at $100 per share. The $1.25 quarterly dividend translates into an expected $5 per share annual dividend ($1.25 x 4 = $5). The $100 stock therefore features a 5 percent dividend yield ($5 / $100 = 5 percent). You would therefore expect to collect $50 in dividends over the next year, if you were to make a $1,000 investment into Oil Company X.

How to Calculate Dividend Yield: Company Type

Larger companies within established industries, such as utilities, banking, oil, and tobacco, are likely to offer higher dividend yields. These firms operate with fewer growth opportunities — so investors typically prefer that larger portions of profits are returned in the form of dividends. Alternatively, small companies that operate within cutting edge software, biotechnology, and semiconductor fields will pay minimal dividends, if any. These companies are more likely to reinvest the majority of profits back into their respective businesses to finance growth through equipment purchases and research and development expenses.

How to Calculate Dividend Yield: Warning

Contrary to bond interest, a corporation is not legally obligated to pay out dividends. Quoted dividend payments and yields may therefore never materialize, if the corporation were to fall into financial distress. As a common shareholder, you are last in line, and will receive dividends after interest is paid on bonds and also after preferred shareholders collect dividends. Be advised that an abnormally high dividend yield may signal a looming corporate bankruptcy. A weak, collapsing stock price does translate into an artificially high dividend yield. Prior to bankruptcy, a corporation will eliminate its dividend altogether.