How To Calculate Dividend Yield

A dividend is a payment from a company or other entity to shareholders tied to ownership of a stock or another security. The timing of a dividend payment is up to the company’s board of directors. While most dividend-paying companies distribute payments quarterly, some stocks pay monthly. A company’s board also decides the dividend amount, which can change frequently depending on the company’s profitability. A dividend yield indicates the amount of annual dividends paid by a company compared to that company’s stock price.

Formula For Calculating Dividend Yield

Dividend yield is presented as a percentage of the stock’s price. That percentage represents the ratio of yearly dividend payments divided by the stock’s current price. The formula for calculating a dividend’s yield can be broken down into two key steps. The first step is to calculate the total annual dividend and the second is to calculate dividend yield.

To calculate the total annual dividend, determine the dividend frequency and the amount of the dividend payment. Then, multiply the frequency by the payment amount. The formula is as follows:

Annual Dividends = Dividend Payment Per Period * Dividend Frequency

Then, find the company’s current share price. To calculate the dividend yield, divide the annual dividends by the current share price. The dividend yield is expressed as a percentage.

Dividend Yield = Annual Dividends / Current Share Price

Altogether, the complete formula is:

Dividend Yield = (Dividend Payment Per Period * Dividend Frequency) / Current Share Price

For instance, assume Company X pays a quarterly dividend (four payments per year) and that the payment amount is $1.

$1 * 4 = $4 annual dividends

Then, assume that Company X’s current stock price is $100.

$4 of annual dividends / $100 share price = 4% dividend yield

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How Do You Calculate Dividends Per Share?

Dividend yield is calculated on a per-share basis, but public companies often announce dividends by the total amount of money that will be paid to shareholders. While some companies will break the numbers down, it’s helpful to understand exactly how dividends per share are calculated.

To calculate dividends per share, divide the total size of all dividends paid in a certain period by the number of outstanding shares. Outstanding shares include all shares owned by investors, often totaling millions or billions of shares.

The formula is:

Dividends Per Share = Total Dividends Paid in Time Period / Total Outstanding Shares

For example, Company X might announce that it is paying $2 billion in dividends for a quarter without sharing the exact dividends per share number. Assume Company X has 1 billion shares outstanding.

$2 billion in quarterly dividends / 1 billion shares outstanding = $2 dividend per share

What Is A Dividend Payout Ratio?

The dividend payout ratio measures the total amount of dividends paid compared to a company’s net income. The figure indicates the percentage of a company’s bottom line that is given to shareholders. Dividend payout ratios can vary greatly depending on the company and its priorities.

A higher dividend payout ratio indicates a company that is seeking to attract investors with large dividend payments. Most companies with high dividend payout ratios are mature companies, meaning that they may not present the same opportunities for share price growth compared to growth companies. These companies payout a large amount—sometimes 100%—of earnings as a way to attract investors who otherwise wouldn’t be interested because of the lack of upside.

A lower dividend payout ratio is not necessarily a negative sign for a company. It can indicate that a company is reinvesting profits in research and development or that the company plans to buy back stock. Some companies prefer to modestly raise dividends each quarter or year, rather than immediately raising the dividend payout ratio to the highest possible level.

The dividend payout ratio can be calculated with two formulas, depending on the available information. One way to calculate it is to divide the total amount of dividends paid by the total net income. The payout ratio can also be calculated using per-share numbers, by dividing the dividend per share by the earnings per share. The formulas are:

Dividend Payout Ratio = Total Dividends Paid / Net Income

Or

Dividend Payout Ratio = Dividend Per Share / Earnings Per Share

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What Kind Of Companies Pay Dividends?

Companies that pay dividends are typically mature and earn a steady profit. They also tend to be companies that don’t need to dedicate a considerable portion of earnings to innovating. As such, they are often in sectors that aren’t heavily impacted by economic downturns, such as oil and gas or healthcare and pharmaceuticals. Other common sectors include banks and financials.

Hundreds of companies in the S&P 500 pay dividends to shareholders. (See Best Dividends Stocks For Reliable Income for more.) Other dividend-paying securities include real estate investment trusts (REITs) and master limited partnerships (MLPs), as well as some mutual funds and exchange-traded funds (ETFs).

The most elite, stable dividend paying companies are called dividend aristocrats. Dividend aristocrats are companies that have raised their dividends for 25 straight years. The current list includes 64 of the healthiest companies in the U.S. These companies consistently generate a profit, allowing the board of directors to approve a higher dividend each year. Companies on the list include IBM
IBM
, Walmart
WMT
and PepsiCo
PEP
.

Five Top Dividend Stocks to Beat Inflation

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