What is Stock Yield?
Stock yield, also known as dividend yield, is the ratio of the dividends paid out by a company each year relative to its stock price. It tells you how much income you receive in terms of dividends for each dollar invested.
Stock yield is a key metric for income-focused investors. The higher the yield, the more dividend income you receive relative to the price you paid for the stock.
How to Calculate Stock Yield
The formula for stock yield is:
[\text{Stock Yield} = \frac{\text{Dividend Amount} \times \text{Payments Per Year}}{\text{Stock Price}} \times 100%]
Where:
- Dividend Amount is the sum of money paid per dividend
- Payments Per Year is how often dividends are paid (4 for quarterly, 2 for semi-annual, etc.)
- Stock Price is the price at which you bought the stock
Calculation Example
Suppose a stock pays $30.00 each quarter (4 times a year) and you purchased it at $300.00 per share.
- Dividend Amount: $30.00
- Payments Per Year: 4 (quarterly)
- Stock Price: $300.00
[\text{Stock Yield} = \frac{30 \times 4}{300} \times 100% = \frac{120}{300} \times 100% = 40%]
The stock yield is 40%, meaning you receive 40% of your initial investment back each year in dividends.
More Realistic Example
A blue-chip stock pays $0.75 quarterly with a share price of $50:
[\text{Stock Yield} = \frac{0.75 \times 4}{50} \times 100% = \frac{3.00}{50} \times 100% = 6%]
A 6% yield is considered high for most established companies.
Understanding Yield Levels
| Yield Range | Classification | Typical Companies |
|---|---|---|
| 0-2% | Low | Growth stocks, tech companies |
| 2-4% | Average | Established blue chips |
| 4-6% | High | Utilities, REITs, telecoms |
| 6%+ | Very High | May indicate higher risk |
Important Considerations
High Yields Can Be Warning Signs
Sometimes a high yield indicates trouble rather than opportunity. If a stocks price drops 50%, its yield doubles even though nothing has improved. Always investigate why a yield is unusually high.
Yield on Cost vs Current Yield
- Yield on Cost: Uses your purchase price, showing your personal return
- Current Yield: Uses today market price, useful for comparing investments
Dividend Growth Matters
A stock with a 2% yield that grows dividends 10% annually may outperform a 5% yield stock with no growth over the long term.
Quick Recap
- Stock yield measures dividend income relative to stock price
- Higher yields mean more income per dollar invested
- Be cautious of unusually high yields
- Consider both yield and dividend growth potential