Calculating Stock Dividend Yields

Calculating stock dividend yields is one of the many ways for some analyst to determine the attractiveness of stock as an investment. Investment professionals use different ways of identifying the best and most attractive stocks for investments. There is no universal agreement on which method of evaluating stocks to determine best investments. Some analyst focus on the entirely growth rates revenues while others may concentrate more the fundamentals of the business such as it financial health and market share. Investors have enjoyed success using various methods. However, most experts will agree dividend payments are a significant factor in determining if that business is doing well.

The fact that a company returns a portion of its earnings to investors is a positive factor to consider. Shares' price growth of a company is also generally considered a positive sign. The fact that investors are willing to pay a higher price for a stock usually, but not always, indicates that a company is doing well. Therefore, the relationship between these two factors is believed by many to be an important way of determining value of a stock.  This relationship is defined as the current dividend yield.

The Mathematics

It is derived by dividing the most recent full year dividend by the current share price. For example, if a company pays out $2 per share in dividends in a given year and the current price is $40, then the current dividend yield is 5% ($2 divided by$40). In this example, if the price of the stock falls to $20 then the dividend yield would be 10% ($2divided by$20). If the company raises the dividends on this hypothetical stock while the price is $20 by 10%, an investor who owns the stock would have a different yield. Instead of a 10%, this investor’s yield will increase by10% (at the same rate dividend increased) to 11%. This calculation, based on the dividend increase, is referred to as effective yield. If the investors' original cost of the investment changes from $20 a share to a lower cost because of options trading, the yield calculation would again change. This calculation is known as adjusted yield.

The Meaning of Dividend Yield

A high dividend yield is generally considered to be a positive sign for investors. It could mean the stock is selling at a cheap price and undervalued as compared with the dividend payment. However, it could also mean the company has fallen on hard times and the future dividends may be cut. A low dividend yield could mean the stock is overpriced. But, this could also be an indication that future dividends may be increased. Some analysts also look at the dividend yield of the overall market. Therefore, the dividend yield of Dow Industrial and Standard and Poor 500 index are used as financial indicators. As stated earlier, there is no universal agreement on the absolute best way to determine the best stock prices. Therefore, the importance of dividend yield is still a debated topic.