Dividend yield
From Wikipedia, the free encyclopedia
The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It's often expressed as a percentage.
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[edit] Preferred share dividend yield
Since payment of the dividend is stipulated by the Prospectus, owners of preferred shares calculate multiple yields to reflect the different possible outcomes over the life of the security. Be aware that these yields will be different from the company's point of view. The company will continue to call their security (e.g.) a 6%--- when the stated dividend is 6% of the issue price of the share.
- current yield is the $Dividend / Pfd share current price.
- Since the share may be purchased at a lower (higher) cost than its final redemption value, holding it to maturity will result in a capital gain (loss). The annualized rate of gain is calculated using the Present value of a dollar calculation. ('PV' is the current stock price. 'FV' is the redemption value. 'n' is the number of years to redemption. Solve for the interest rate 'r'.) The yield to maturity is the sum of this annualized gain (loss) and the current yield. Alternately you can use an online bond calculator at [[1]]
- There are other possible yields discussed at Yield to maturity.
[edit] Common share dividend yield
Unlike preferred stock, there is no stipulated dividend for common stock. Instead, dividends paid to holders of common stock are set by management, usually in relation to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. Due to the difficulty in accurately forecasting future dividends, the most commonly-cited figure for dividend yield is the current yield which is calculated using the following formula:
For example, take a company which paid dividends totalling $1 last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows:
Rather than use last year's dividend, some try to estimate what the next year's dividend will be and use this as the basis of a future dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Index[2]. It should be noted that estimates of future dividend yields are by definition uncertain.
[edit] History
Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield can be considered to be evidence that a stock is underpriced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher.
Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.
The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some bearish investors as indicative that the market is still overvalued.
[edit] Related Reference
- Cohen, R.D. (2002) “The Relationship Between the Equity Risk Premium, Duration and Dividend Yield [download],” Wilmott Magazine, pp 84-97, November issue.
[edit] Dow Industrials
The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%.
With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.
[edit] S&P 500
In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings.
