Learn how to calculate dividends and other important dividend investing terms in minutes
Investing in dividend stocks is a no-brainer for most investors. Who wouldn’t want to get paid while you wait for the stock price to run higher? In fact, many investors focus exclusively on buying dividend stocks to the point they can live off their dividends.
But jumping into the world of dividend investing isn’t easy. It’s a whole new world of jargon, terms and numbers that most people aren’t familiar seeing. For that, I decided to put together a list of the most important dividend terms and calculations. With this list, you’ll be able to easily calculate dividends and everything that comes with them. I’ll show you how to calculate the dividend yield and other terms so you know exactly what you’re getting when you invest.
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What is Dividend Yield?
The dividend yield is the percentage you earn in dividends every year on the current stock price. For example, Coca-Cola pays a 2.76% dividend yield on its shares. That means if you buy a share of stock for $63.87 then you’ll receive a return of 2.76% over the next year.
What is Dividend Yield?
There are a couple of important ideas to understand here. First is that dividend yield is always shown as a yearly return. Some stocks pay dividends every three months and some pay every month but you’ll only get that percentage return for the year. If you want to know how much you’ll get with each dividend payment, whether monthly dividends or quarterly, then divide the dividend yield by the number of payments.It’s also important to note that dividend yields can increase or decrease. When we look at how to calculate the dividend yield next, you’ll see it’s a matter of the stock price and dividend payment. Both of these can change so the dividend yield changes with them.
How to Calculate Dividend Yield
Calculating the dividend yield on a stock is simple. You find how much the company is paying each year in dividends. Websites like Yahoo Finance will show this as a yearly number or you can just find how much a stock is paying as a quarterly dividend and multiply it by four to get that yearly amount.
You then take that yearly dividend and divide by the stock price as in the example below. Coca-Cola pays a quarterly dividend of $0.44 per share, or times four for an annual dividend of $1.76 per share. If you divide $1.76 by the stock price of $63.86 then you get a 2.76% yield.
How to Calculate Dividend Yield
Remember though, if the stock price or dividend payment gets changed then that dividend yield will change. If shares of Coca-Cola increase to $100 each and the dividend stays the same then the dividend yield will fall to 1.76% for new investors. If the Board of Directors increases the dividend to $2.00 a share on the current stock price then the new yield will be 3.13% on the same price.
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What is the Average Dividend Yield?
The average dividend yield for stocks in the S&P 500 is currently 1.3% but has been higher in the past. The average dividend yield for stocks is usually closer to 1.8% but since prices have gone up over the last few years, and dividend payments have not gone up as fast, then the dividend yield has come down.
That’s not to say the average dividend yield won’t go back up. If stocks sell off or even crash lower, then the dividend yield will increase if companies don’t cut their payments. Companies hate cutting their dividend payments so it usually doesn’t happen even in a recession. That means the best times to buy dividend stocks are when prices are going down because you’ll still get that same dividend but on a lower stock price, so a higher dividend yield!
What is a Good Dividend Yield?
What makes a good dividend yield depends on what types of stocks you’re buying. For dividend-focused stocks, I look for at least a 3% dividend yield. If a company is paying less than a 3% dividend yield it usually either means the stock price has jumped higher and is now expensive or that the management doesn’t prioritize paying dividends.
For growth and tech stocks though, it’s not uncommon for a company to go years without paying a dividend. These companies have lots of growth opportunities and need to reinvest that cash into the business rather than sending it back to investors. For tech stocks, even a low dividend yield of one- or two-percent might be considered a good dividend.
How to Calculate Dividend Income
Being able to calculate the dividend yield is one thing, but you want to know how much you can expect in dividend income! This is another easy calculation and is just the number of shares you own times the dividend payments, either on a quarterly or yearly basis.
For example, Coca-Cola pays a $0.44 per share dividend every three months or $1.76 per year. If you buy 100 shares of stock for $6,401 then you’ll get 100*$0.44 each quarter or $44 in dividend income every three months and $176 per year.
How to Calculate Dividend Income
One thing to point out is the dividend yield may not be helpful in understanding how much dividend income you make. If you’re just now buying the stock, then the dividend yield times how much you invest will tell you the dividend income over the next year. As the price changes though, then the dividend yield will change but you’ll still have the same number of shares and will receive the same amount of income until the company changes the payout.
What is the Dividend Payout Ratio?
The dividend payout ratio is an important indicator in dividend stock analysis. This is the percentage of profits paid out to cover the dividend.
Why this is important is because it shows you how much of profits the company is holding back to reinvest in growth. It also may point to the sustainability of the dividend and is a good measure to compare against other dividend stocks.For example, if we find out that Coca-Cola has a payout ratio of 75% then we know it’s paying out three-quarters of its profits to cover the dividend. That doesn’t leave much money to reinvest so we shouldn’t expect the company to grow very fast or the stock price to jump higher. It also could mean that the company cannot grow its dividend very fast because it’s already paying out most of its profits.
How to Calculate Dividend Payout
To find the dividend payout ratio, you need the amount of dividends paid each year and the net income per share. These are both easy to find and available on most investing apps.
If you scroll down on any stock page on Yahoo Finance, you’ll see in the right sidebar a box showing earnings per share for the last year. If we add these up for Coca-Cola, we find the company reported $2.33 per share in the last four quarters.
We’ve already seen that KO pays dividends of $1.76 per share, paid in quarterly payments. So taking the dividend payment divided by earnings gives us that 75% dividend payout ratio.
How to Calculate Dividend Payout Ratio
What is a Good Dividend Payout Ratio?
There is no ‘good’ dividend payout ratio but it can tell us a lot of things about a stock, its dividend growth and how it compares to other stocks.
First, if we compare a company’s payout ratio with the average for other companies in the industry, we can get an idea for how much competitors are reinvesting in the business. If we find that PepsiCo is only paying 50% of earnings out for its dividend versus 75% for Coca-Cola then we might worry that KO isn’t holding enough back to reinvest. If Pepsi is able to use the extra profits to grow its business faster, does that mean growth for Coca-Cola could slow down?
We can also compare the payout ratio for KO to where it’s been in the past for an idea of dividend sustainability. If Coca-Cola has historically paid out about 60% of its earnings to the dividend but now that payout ratio has crept up to 75% then does it mean the dividend has grown too fast to be sustainable? Obviously at some point, management needs to make a decision to sacrifice either growth or dividends. KO cannot expect to pay out 100% of earnings as a dividend and still compete against peers like Pepsi.
How to Calculate Dividend Growth
Dividend growth is an often overlooked measure of dividend health but very important for investors. This is the percentage the company has increased its dividend in the past. Many companies pride themselves on consistently increasing the dividend payment every quarter or every year.
In fact, there’s even a name for those stocks that regularly increase dividends. The Dividend Aristocrats are those companies that have increased the dividend payment for at least 25 consecutive years, some for more than 40 years straight.
Knowing that a stock is going to continue to put more money in your pocket is a great feeling and an excellent way to invest.
To calculate dividend growth, you can go to the ‘Historical Data’ tab on Yahoo Finance and change the table to show Dividends Only. This is going to show you all the dividends paid by a company over a certain time period. I like to use the last five- or ten-years to get a long-term average.
For example, we see that Coca-Cola has increased its dividend from $0.37 to $0.44 per share over the last five years. If we divide the current dividend payment by the prior, $0.44 divided by $0.37, then we get growth of 18.9% over five years or 3.5% per year annualized.
What is a Good Dividend Growth Rate?
Just like the payout ratio, a good dividend growth rate will depend on the industry and specific stock. As an investor, you want to see your companies increasing the dividend but not at the expense of future growth.
For example, Coca-Cola probably could have increased its dividend by 5% a year in the past but that would have seriously limited how much money it reinvested for growth. A company that increases its dividend is making a commitment to pay that out to shareholders and management never wants to cut the dividend.
Don’t let investing terms and jargon keep you from putting cash in your pocket! Investing in dividend stocks is one of the best strategies out there and it’s really simple to calculate dividends and how much you’ll make. Try doing an example with the dividend calculations above on shares of Coca-Cola, ticker KO, to test your new knowledge!
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