How to Calculate Dividend Yield
Dividend Yield Explained
Dividend yield or dividend yield on market is the ratio between the annual dollar value of the dividend a company pays and the company’s share price, represented as a percentage.
Using simple math, you can determine the dividend yield of individual stocks and your entire portfolio. This information can be a useful tool for investors while evaluating investments in particular stocks as well as planning for retirement.
However, dividend yields don’t often reveal the complete picture and shouldn’t be the only factor in making investment decisions.
Definition and Examples of Dividend Yield
Since it's a ratio of annual dividend to stock price, dividend yield simply tells you how much cash flow your investments generate, represented as a percentage of the value of your holdings.
When a company pays a dividend, it returns a portion of its profits to shareholders on a fixed schedule, usually each quarter. Investors can take dividends as cash that they can keep, or they can reinvest the dividend income by buying new shares.
Dividend yield can change over time along with changes to how much the company pays in dividends and fluctuations in stock price.
How to Calculate Dividend Yield
On an individual stock, the formula for dividend yield is simply the amount of the dividend divided by the share price of the stock. Then multiply by 100 to turn the result into a percentage.
For example, if a company pays a dividend of 25 cents every quarter, then the annual dividend paid out would be 25 cents x 4 quarters = $1.
If the company’s stock is priced at $100 per share, then using the formula above, the dividend yield would be:
$1 / $100 = 0.01
0.01 x 100 = 1%
Similarly, a $50 stock with a $1 per share annual dividend has a dividend yield of 2%. When the price of that $50 stock drops to $40, the dividend yield changes to 2.5%. If it increases to $60, the dividend yield becomes 1.7%.
When considering the dividend yield of an entire portfolio, it’s most intuitive to toggle your numbers up and down to see what you’re up against. It’s best to run various scenarios with online calculators or discuss them with your financial advisor if you’re playing with these numbers as part of your retirement planning.
Why Dividend Yield Matters
Dividend yield matters because it shows investors how much income they can expect to see from a particular stock or their portfolio as a whole.
If you’re planning for retirement—or some other event where you want to access your investment (dividend) income—it’s best to have an idea of how much money you’ll need and the assortment of holdings that can get you there.
Consider this from the two most useful standpoints.
Let’s say you own 100 shares of a $50 stock with a $1 per share annual dividend which means a 2% dividend yield. The value of this hypothetical holding is $5,000 (100 shares x $50). With a 2% dividend yield, you can expect to receive $100 per year in dividend payments (2% of $5,000 = $100).
This doesn’t mean you can simply select any stock that pays a dividend. As with the larger universe of stocks, not all dividend payers are the same. Investors must consider other factors and weigh their risks before making a decision.
Super high dividend yields could signal financial trouble at a company. Remember, as stock price decreases, dividend yield tends to increase, and the company may not be able to keep up with dividends forever.
One way to assess the strength of a dividend is to look at a company’s payout ratio. Payout ratio is a straightforward mathematical equation expressing the percentage of a company’s net income that it pays out to satisfy its dividend.
Ideally, you want a company’s payout ratio to be around 40% to 60%. Anything much higher (or lower) requires a closer look.
One of the most tried and true methods for selecting dividend stocks is loosely related to yield—dividend growth. Simply put, does a company have a long history of increasing its dividend annually? You can find the best of breed in dividend aristocrats—companies with a 25-year or longer history of dividend increases.
Even here, proceed with caution. History is littered with examples of strong companies with a solid track record of paying—and even increasing—dividends who ran into trouble.
For example, General Electric (GE) had a long dividend-paying legacy before it was forced to cut its dividend from 31 cents to 10 cents in 2009 during the Great Recession. This cutback in dividend was GE’s first since 1938 and was an indicator of tougher times ahead. In 2009, before it slashed its dividend, GE’s dividend yield was 10.6%.
Since then, GE has seen its stock price drop, been forced to spin off businesses, and cut jobs. An original member of the Dow Jones Industrial Average in 1896, and a continuous constituent of the index since 1907, GE lost its place in the Dow in 2018. In 2019, the company slashed its quarterly dividend payout down to 1 cent. Its share price was $11.08 in December 2019, which means its dividend yield was about 0.3%—much lower than what it was 10 years earlier.
Your Overall Portfolio
If you intend to live off of the income your entire dividend stock portfolio generates, you need to know two basic things.
First, determine how much money you require to live. Let’s say it’s $40,000 a year. From here, the second consideration comes in. How large of a nest egg will you require in association with the dividend yield of your entire portfolio?
For example, if you have $500,000 invested, your portfolio will need to yield 8% to throw off $40,000 in annual income. While not impossible, it’s a rather lofty goal. A $1,000,000 portfolio that generates $40,000 a year in income has a dividend yield of 4%.
Dividend Yield on Market vs. Dividend Yield on Cost
Knowing the difference between dividend yield on market and dividend yield on cost can help you more effectively analyze the performance of your dividend stock portfolio. These terms can sound daunting, but don’t fret—they’re really not.
Dividend yield on market is simply the dividend yield based on a stock’s current share price.
To get the dividend yield on cost, look at what you paid for the stock when you added it to your portfolio. Take the stock’s annual dividend and divide it by the original share price rather than the current share price.
|Dividend Yield on Market||Dividend Yield on Cost|
|Based on the stock’s current share price||Based on the stock’s share price at the time you added it to your portfolio|
For example, if the stock’s annual dividend payout is $4 and the current share price is $100, the dividend yield on market is 4%. If the same stock cost $90 when you added it to your portfolio, the dividend yield on cost is 4.4%.
By calculating dividend yield on cost, you accomplish two things: You factor in a company’s dividend growth without punishing it for stock price appreciation.
As a company’s stock price increases, its dividend yield decreases. Yield on cost takes this into consideration because you’re using your original cost basis in the calculation, as well as dividend growth, which can offset a decrease in yield related to an increase in a company’s stock price.
The Bottom Line
Because myriad factors impact investment strategies and retirement planning, plus how you’ll actually use your portfolio in retirement, it’s best to consult a financial advisor to tease out the nuance of your particular situation. However, generally speaking, determining dividend yield can help you understand the size and scope of the income you can expect to receive from individual stocks and your overall portfolio now and into the future.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.