Dividend Yield ExplainedLet's take a look at what exactly dividend yield is. We will also work through some examples to better understand the concept.
When you take the annual dividend declared by a company and divide it by the current stock price you get dividend yield.
Investors expect to profit from buying stock in a company by two ways — increase in the stock price (also called capital appreciation) and dividends. That part of the return coming through dividends is really the yield. To gain capital appreciation you have to sell your stock. Not so when it comes to dividends ... you still hold on to your stocks while pocketing the cash dividend.
Consider France Telecom (FTE), the incumbent telephone operator in France. In 2009, it paid out cash dividends twice — in May and August — amounting to an annual amount of $1.97. On Dec.31, 2009, its stock price closed at $25.24. How much of a yield did FTE's dividend provide for 2009? Applying our formula, we get: Now, let's look at Johnson & Johnson (JNJ), the world's largest and most diverse health-care company. In 2009, JNJ declared a dividend 4 times — in February, May, August, and November — totaling $1.93. The end of 2009 saw its stock price close at $64.41. As you can see, when it comes to dividends yield is more informative than actual dividend amounts. Both FTE and JNJ paid out almost the same dividend amount in absolute terms. Yet, FTE's dividend provided a return that was about 2.5 times that of JNJ. To wrap up, yield is an important concept when it comes to dividend investing. We've gone through the details of how to calculate it with a couple of examples. Yield tells us much more than absolute dividend amounts. Please subscribe to our Free Newsletter for great tips on how to get started and learn to invest by yourself. Return from Dividend Yield page to Dividend Investing page
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