A company can choose to distribute a portion of its earnings as cash dividend payments to stockholders. Dividend payments can boost your stock returns and increase your portfolio's value. You can measure a stock's annual dividend payment per share as a percentage of its price per share to determine how much the dividend payment is adding to your returns. This percentage is called the dividend yield, which is a key measure in selecting dividend stocks. With all else being equal, a stock that pays a higher dividend yield has the potential to generate higher returns.
Visit any financial website that provides stock information and find in a stock's quote section its trailing 12-month dividend payment per share, which is the total amount of dividend payments the stock distributed to stockholders over the last year. For example, assume a stock has a $2 per share trailing 12-month dividend payment.
Find on the financial website the stock's current price per share, which is the price at which an investor could purchase the stock. In this example, assume the stock's price per share is $40.
Divide the stock's trailing 12-month dividend payment per share by its price per share to calculate its dividend yield. In this example, divide $2 by $40 to get 0.05, or a 5 percent dividend yield. This means the stock's dividend payments over the last 12 months represent 5 percent of its current stock price.
Compare the stock's dividend yield with your minimum yield requirement to determine if the stock meets your investment criteria. In this example, if you require a dividend yield of 4 percent, the subject stock's dividend yield, at 5 percent, meets your requirement and may warrant further research as a potential investment.
- You can also use a company's expected dividends for the next 12 months, which a company may disclose in its annual report, to calculate its forward dividend yield.
- Older companies with established products and market shares typically pay a higher dividend yield than younger companies that are reinvesting their earnings into their business for growth.
- A stock's dividend yield will rise if its stock price falls. Watch for a dividend yield that is unusually high, which may signal that a company is in financial trouble.