Dividend Yield Calculation and Drawbacks
Many investors prefer to buy stocks of companies that pay dividend. They mostly prefer it if their intentions are to keep the stock over the long-term.
Dividends represent a current income, which if added to price appreciation may lead to growth, which in turn adds further to your profits. On the other hand, if you are wise enough you will reinvest the dividend. You will deprive yourself of the current income, but you will gain further dividends in the future to come.
In order to evaluate whether a particular stock represents a good investment in dividend terms, investors often use dividend yield as a measurement. It represents the percentage that the stock returns as compared to its price.
Dividend Yield Calculations
The formula for the calculation of dividend yield is as follows:
Dividend Yield = Annual Dividend per Share / Stock's Price per Share
Dividend Yield Formula Drawbacks
The more observant of you have noticed that the denominator of the formula includes the price per share of the stock. This may have tricky result on the yield dividend since a decrease in the price, which at the same time is accompanied by a dividend of the same value as before leads to an increase in the dividend yield.
Dividend Yields as a Stock Selection Criterion
In order to find a company that pays high dividend yields, you can use the services of different stock screens, such as Morningstar.com.
Dividend yield should represent only one of the criteria for selecting a stock for investment. You should not depend only on it and use other measurements in evaluating the potential profitability of a stock because a high dividend yield company not always guarantees you that in the future you will enjoy these high dividends.
Generally, dividends are paid from the earnings that the company makes and then it is paid in cash to its shareholders. Still, there are many cases in which the company has made an acquisition and has used a debt to cover for it. Under such conditions you should try to find the means by which the company will repay the debt and how this will reflect on the cash availability of the company.
So, when you select a company you should check not only its dividend yield, but also history of steady growth and earnings and predictions on the revenue growth.
Final Piece of Advice
When you pick a stock, pay attention not only to its dividend yield, but also to its other fundamentals. This is required for since a high dividend yield may be misleading and may result in an unsuccessful investment decision.
|Rate this article : Low
- Pick the Best Stock Type for You
- Cyclical vs Non-Cyclical Stocks
- Book Value Explanation
- Dividend Payout Ratio Calculation
- Dividend Yield Explanation
- Stock Beta Value
- Operating Cash Flow Implications
- Stock Valuations - Key Interest Rates Relationship
- Price to Book Ratio Calculation
- Return on Equity Calculation and Drawbacks
- How to Benefit from Short Sellers
- Earnings per Share EPS Calculation
- PEG Ratio Calculation
- Simple Return vs Compound Annual Growth Rate Formula
- Price to Cash Flow Ratio vs Free Cash Flow
- Institutional Investors and Their Influence on Stock Trading
- Company Valuation Methods - Debt Evaluating
- Company Valuation Methods - Management Effectiveness Ratios
- Company Valuation Methods - Debt Evaluation Formulas
- Determining the Right Stock Price
- The Importance of Earnings in Evaluating Stocks
- Price to Sales Ratio Calculation
- Price to Earnings Ratio Calculation
- Cash Flow Valuation
- Calculate Return on Investment
- Relative Strength Indicator
- Non-Financial Characteristics of a Successful Stock
- Per-Share Price vs Market Cap
- Value Stocks vs Growth Stocks
- Identifying a Value Stock
- Small Cap Stocks Opportunities and Risks
- Stock Analyst Recommendations - Should We Trust Them?
- Value - Growth Stocks Comparison
- Investing in Hedge Funds: Pros and Cons
- Price to Sales Ratio (PSR) Explanation
- Funds of Hedge Funds
- Investing in Interval Funds
- How to Select a Winning Stock from a 52-Week List
- Earnings Estimates and Stock Selection