Formula 101: Dividend Yield
Today we start our series on financial formulas. Throughout this series over time we will look at all sides of the financial business and try to clarify the mathematics behind the concepts. Our first entry deals with a simple one the Dividend Yield which basically is the cash return on your investment calculated in percentage points for a business paying dividends.
You will find this reported every day throughout the financial press and at financial websites but these numbers are based on the stocks closing price. If you buy stock, your dividend yield will always be based on the price you paid, so it will be different from what is reported throughout the financial press. In that case your dividend yield for that particular stock remains the same and doesn´t change unless you change your position size and add or subtract from your current position.
Let´s look at the formula:
Y = D/P
where
D = Dividend per share
P = Current (Or your) price per share
Y = Dividend Yield
Now let´s look at an example at Yahoo Finance. We have chosen Boeing Corporation, a well known name from the Dow 30. In our case the data shows a closing price of $51.90 (when you hit the link it most probably shows a different closing price, which in turn will change the dividend yield but just follow along and you can come up with the current dividend yield for the actual closing price you see) and a dividend of $1.68, which then results in a dividend yield of 3.3%.
As long as the company does not change the dividend they pay per share, it will be lower when the share price moves up. And the dividen yield be higher when the share price moves down.
For example let´s assume the share price moves higher to $60 a share but the dividend stays at $1.68, then our new dividen yield will drop to 2.8% but if the price moves lower to let´s say $45 again with a constant dividend of $1.68 then our dividen yield moves up to 3.7%.
Of course if the share price goes up and you own the shares the lower dividend yield will be compensatet by the higher share price you will get when you sell your position.
When evaluating our portfolio we have to take into consideration the dividend yield to find the real risk we are up against. Dividends being paid to us are a profit and need to be taken into account. They lower the risk we have in the portfolio with that particular position.
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