DIVIDEND YIELD

While the dividend payout ratio measures the relationship between dividends and a company’s profits, the dividend yield measures the relationship between dividends and the investment on the part of the trader. It is determined by adding up all dividend payouts over a year, and dividing them by the stock price.

For example, if a company makes four dividend payouts over a year of $2, $5, $7, and $3, it has a total annual dividend payout of $17. If the company’s stock trades at $238, one can simply divide $17 by $238, to get 0.0714. In other words, that company has a dividend yield of 7.1%.

As with dividend payout, the dividend yield is primarily a measure of how established a company is, versus how intent it is with its growth. The newest companies generally do not release a dividend, as all of their profits are reinvested into growth. Smaller but established companies will have a low dividend yield, as they invest part of their profits into keeping long-term shareholders happy, but the bulk of their profits are still invested into growth. And large and established companies will have higher dividend yields, as they are targeting long-term investors, and generally have established themselves in the marketplace to the point where they do not need to invest as much in growth.

In the past few years dividend yields have gone down across the board, and they are a less important rubric for measuring the worth of a stock than they were in the past. This is primarily because even larger companies are often courting long-term investors less, as they can generally get better returns off of private investment, and dividends are taxed doubly in most regions of the United States. As a result, using the dividend yield to determine whether or not a company is in a growth spurt or sitting stagnant should be undertaken with great care.