If you want to be a successful investor, reach Financial Independence and build your stash of FU Money, you may choose to follow a dividend income strategy.
Choosing this way you need to know two important concepts:
- what is the Dividend Yield of a stock;
- how to calculate the Dividend Yield.
The dividend yield is one of the key concepts for investors seeking a cash flow.
Find out what is it and how to calculate the dividend Yield of your favourite stock.
What is a dividend?
First of all, you need to know more about dividends.
This is a key concept for all investors and Financial independence seekers.
What dividend means.
A dividend is a periodic payment a companies make to a shareholder.
It is simply a piece of the profits of the company.
Companies usually pay dividends quarterly, but some of them can declare to pay them at a different period of time (monthly, annual, etc).
What is the Dividend Yield?
Dividend yield is a extremely useful tool for every investor.
It is a ratio, expressed as a number in percentage, used by investors to calculate what is the return on their investment, based on the amount of money in dividend a company will pay annually, in relation to the current stock price.
How do dividend stocks work?
In other words, Dividend Yield is – in percentage – the amount of money a company pays to you as a shareholder for simply owning a share, divided by the current price of the stock.
This number can tell you about the income you can reasonably expect in the future for owning a stock.
For example: stock XYZ today is priced $100. The annual dividend is $5 per share..
The dividend yield is 5%.
How to calculate the Dividend Yield.
Here is the formula you need to calculate the Dividend Yield of a stock:
DIVIDEND YIELD= (ANNUAL DIVIDEND PER SHARE / CURRENT STOCK PRICE) x100
The Dividend Yield can rise if the price of the stock falls (and that is usually a good thing). Viceversa, it can fall if the price of the stock rises.
So, dividend yield can often look high for stocks that are going down in value.
Conversely it can look very low for stocks with a high price.
Dividend yield is a crucial instrument you have to learn if you want to be a successful investor.
It is one of the key factors to estimate in the right way the potential profit and the risk for every dollar you invest in company stock.
What dividend yield is good?
Today the current average S&P 500 dividend yield is 1.38%. From 2008 to 2018, it was on average around 2%.
A dividend yield of 2% or more, at the present day, would be considered good.
Obviously, some companies can do better than that, and often they have a Dividend Yield around 4%-5%.
You can also find solid Blue Chip Stocks with a rate of around 6%: It usually is a signal that the company is in a position that can easily generate an income.
So where to find some of these beautiful dividend-payers companies? Here is a list.