Understanding Dividend Yields

Dividend investing is a popular choice for investors who want regular income.  In order to be a savvy investor, it’s important to understand and explore dividend yields, including what they are, how they are calculated, and why they matter.

What is a Dividend Yield?

A dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. The dividend yield is expressed as a percentage, making it easy to compare across different companies and sectors.

Calculation of Dividend Yield

The dividend yield is calculated by dividing the annual dividends per share by the price per share and multiplying the total by 100 to obtain a percentage.

For example, if a company pays an annual dividend of $2 per share and its current stock price is $40, the dividend yield would be:

(2 divided by 40) × 100 = 5%

This means that for every $100 invested in the stock, an investor can expect to receive $5 in yearly dividends.

Why Dividend Yields Matter

Dividend yields are an important metric for several reasons:

Income Generation For many investors, especially those on a fixed income, such as retirees, the primary appeal of dividend stocks is the regular income they provide. A higher dividend yield typically means more income.

Investment Comparison Dividend yields allow investors to compare the income-generating potential of different stocks. This can help in selecting stocks that align with their income goals.

Market Sentiment Dividend yields can also provide insight into market sentiment. A very high dividend yield might indicate that a stock is undervalued, but it could also signal that the company is in trouble and that the stock price has fallen significantly.

Types of Dividend Yields

Dividend yields can be classified into several types, which can provide different perspectives for investors. Your HCM advisor can explain different options such as forward, trialing, and current dividend yield as well as Dividend Reinvestment Plans (DRIPs), and give you advice that will meet your goals. 

 Understanding dividend yields is key to building a portfolio that generates regular income and is a key strategy HCM regularly uses. By knowing how to calculate and interpret dividend yields, investors can make informed decisions and select stocks that align with their financial goals.