Calculating Dividend Yields
Recently, I have heard many people refer to the yields being paid on the stocks they own. It usually sounds like “I’m getting 6%” or “my stock pays 4”. I don’t usually hear any reference to the actual price of the stock. Yield depends on the price. Neither is static.
As the price of a stock falls, the dividend yield rises.
As the price of a stock rises, the dividend yield falls.
A stock selling for $20 per share that pays a 0.10 dividend per share quarterly has a yield of 2% (0.10 x 4 = 0.40 / 20.0 = 0.02 x 100 = 2%). If the stock price rises to $22 and the company leaves the dividend unchanged, the yield will fall to 1.82%.
Many people have owned certain stocks for a very long time. To ascertain your actual yield, it is important to do the math from time-to-time. Yield is also different from total return but I’ll save the details on that for another day.
Prior to the recent climb in the U.S. equity market valuations, much attention was being given to the very attractive yields being paid by many U.S. companies to their common stock holders. As the Dow Jones Industrial Average (DJIA) and the S&P 500 Index have risen, many of these yields have fallen. This does not necessarily make them less attractive but income investors must review the current yield to that of other less risky investments to decide if they are being fairly compensated for the risks they may be taking.
Once yield has been accurately calculated, an investor should determine what the real rate of return is by considering tax implications of receiving this income. How much are you keeping after taxes? Are your dividend paying stocks in a taxable account or an IRA? Which one makes more sense for you? It is not the same for everyone.
I monitor these yields and do these calculations regularly for my clients. If you have questions about how, when and why I do this, please call (480) 836-2326 or write to susan@linkousgroup.com.
Note: The 15% tax rate for qualified dividends has been extended and applies to most of my clientele. Stock investing involves risk including loss of principal. Companies are not required to pay dividends to their common shareholders and can change their policies regarding dividend payments.
Quote of the Week: “That which has been believed by everyone, always and everywhere, has every chance of being false.” ~ Paul Valery
Until next week,
Susan Linkous