The dividend yield of a company's
stock offerings is the yearly total dividend payments
that the corporation makes divided by its market capitalization.
The dividend yield can also be expressed as dividend per
share divided by the share price.
The Two Dividend Yield Formulas
| Dividend
Yield =
Total Dividend Payments / Market Capitalization |
or
| Dividend
Yield = Dividend per Share / Current
Share Price |
Hypothetical Example
Imagine the current stock price of
a XYZ Corp. is $42.45 Also, the annual dividend payment
per share that it pays out is $1.25. Using this information,
what is the dividend yield?
Dividend Yield =
Dividend per Share / Current Share Price
Dividend Yield = $1.25 / 42.45
Dividend Yield = 0.0295
= 2.95%
Interpretation of Dividend
Yield
High
Dividend Yield |
Low
Dividend Yield |
- Shows that stock is underpriced
(less than its real value)
- Indicates future dividend payments
may NOT be as high as the current one
- Shows the company has been hit hard in times
of economic depression and financial
hardship |
- Shows that stock is overpriced
(more than its real value)
- Indicates future dividend payments might actually
be higher than the current dividend payments
- Shows the company is relatively financially
stable |
Do not use the Dividend Yield as
the lone decision making factor when picking stocks. This
is because the higher the dividend yield doesn't mean
the better the stock is. For example, if a company is
experiencing rapid growth, it will refunnel most of its
retained earnings into research & development to create
more market share in various other industries. Over the
longer term, this company's stock price just goes higher!
Microsoft is a good example.
Dow Jones Industrial Average Dividend
Yield
The Dow Jones Industrial Average
takes the dividend yields of the top 30 highest market
capitalization firms in the US and averages them out.
It is considered to be one of the most important indicators
of the strength of the US stock market. The Dow Jones
Industrial Average (DJIA) has fluctuated between 3.2%
(in high market returns in 1929) and 8% (during low market
returns).
The highest ever Dow Jones Dividend
Yield was seen in 1932 when it was at about 15%. On the
other hand, the lowest ever Dow Jones dividend yield was
seen in the stock market highs of 200, when it reached
a record low of 1.4%
The below is a sample of the 30 companies
that Dow Jones Industrial Average uses when calculating
the average dividend yield.
Company |
Dividend
Yield* |
| AT&T |
5.41% |
| Pfizer |
4.09% |
| Citigroup |
3.63% |
| Coke |
2.76% |
| Exxon |
2.07% |
| Alcoa |
2.03% |
| McDon |
1.96% |
| Caterpillar |
1.72% |
| Boeing |
1.69% |
| Microsoft |
1.37% |
| Time Warner |
1.14% |
* This data is retrieved as of
December 30th, 2005
