One of the most popular metrics for dividend investors, next to consecutive dividend increases, is the dividend yield.
The dividend yield metric provides a way to measure how much you can earn from the company’s dividend from your investment over the year. If you exclude income tax, it can be used to compare against other fixed income investments to assess the risk of your investment against other safer investments.
The dividend yield is always calculated against the stock price making it fluctuate based on the dividend growth and stock movement. When graphed on a chart over time, it can be a good indicator to help decide on adding to an existing position.
Dividend Yield Formula
The market cap of a company is calculated as follow.
Dividend Yield = ((LastDiv * DivFreq) / P) * 100
- LastDiv = Last declared dividend
- DivFreq = Number of regular payments. Usually quarterly but can be annual, semi-annual and monthly.
- P = Price, or quote, for the stock = Market value per share
A company with a stock price of $20 paying a quarterly dividend of $0.25 will have a dividend yield of 5.00%.
How Dividend Earner Uses The Dividend Yield
I break my investing phases into accumulation and retirement. While in accumulation, I focus on dividend growth and total returns. When the time comes to retire, I can start swithing to the retirement phase.
If I have a couple of options that are similar, I will pick the higher yield but in the accumulation phase, the Chowder Score. That approach leaves me with an approximate portfolio yield of 2.00%. Once retirement knocks, my portfolio will shift to bring my yield towards 4.00% while ensuring I have a annual dividend growth above 4% to offset inflation.