A High Dividend Yield Is Not Always A Good Thing
There are two types of investors in the world of stock market investing; The value investors and the growth investors. If you’ve recently got into stock market investing then you might be wondering what does dividend yield mean in stocks? This is one of the common equations measured in investing.
What does dividend yield mean in stocks? The dividend yield is a measure of how much bang for your buck that you are getting for each share that you hold. You will make $X of dividends per year base on the number of shares that you own.
The formula is:
Dividend Yield = Annual Dividends Paid / Stock Share Price
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Considerations When Investing Solely For The Dividend Yield
There are many ratios to look for when choosing which stocks to buy; don’t assume that you will make a lot of dividends based on just the dividend yield. Not to say that a high dividend yield is bad; If the percentage is high, awesome! That means you will possibly be getting a good amount of dividends for every share that you hold if the company can continue to deliver.
You only receive dividends if the company have enough profit/earnings from their operations. The dividend yield can be high, but there is no point if the company doesn’t have enough funds to make the dividend payments to its shareholders.
You also need to ask yourself…
- How much do they have in cash and other assets to maintain?
- How much debt and liabilities do they have?
- What type of sector are you investing in? More volatile and riskier sectors will tend to have a higher dividend yield.
Newer companies who are still developing don’t pay a dividend at all until their growth stabilizes.
Understanding What Does Dividend Yield Mean At The Math Level
As you can recall from earlier, the equation for the dividend yield is = dividends paid / Share Price.
This is not always the case, but if the dividend yield increases while assuming dividend payments remain the same, that means the share price has decreased. There could be many reasons why the share price has fallen, but that’s never a good sign for any company.
What Does Dividend Yield Mean in Stocks Conclusion
Dividends can be a good way for you to make extra income through dividends, but in order to maximize your results and minimize your potential risk, you need to understand more about the ratios in investing.
The dividend yield is a common measure that most beginner investors first learn when choosing their stocks. If you’re a value investor then don’t always be fooled by the dividend yield. Load up on your arsenals by studying other common ratios in investing and don’t just rely on the dividend yield.
I hope you found this blog post helpful and let me know down in the section below any other ratios that can help out other investors out there!