Welcome! Here you will learn how to calculate dividend yield as well as your return on investment from a dividend growth stock.
But first... what is a yield?
It is how much cash you will be paid per share that you own as a percentage of the current market price of the stock.
Here’s an example to clear things up...
Say XYZ Financial is a company that fits the mould. It has a clean balance sheet, good management and a long history of increasing its revenue and dividend payouts for shareholders (don’t worry, you’ll learn about this later!).
XYZ Financial is currently paying out $2.52 per share annually in dividends. The current market price for XYZ Financial is $48.50.
So the yield would be... $2.52/$48.50 = 0.052 x 100 = 5.2%. Not bad!
Ok now that you have an understanding of how to calculate the yield, let’s use it to figure out what your potential return on investment (ROI) would be.
Isn’t that why we are investing in dividend stocks in the first place?
Through research, you found out that XYZ Financial has managed to consistently grow their earnings by an average of 10% annually in the past. Along with growth in earnings, they have also increased their dividend by an average of 10% annually.
I’m starting to like XYZ!
Based on their past dividend growth record and their projected future earnings growth, you assume that they will increase their dividend again by 10% in the coming year.
Your total return would be...
Yield + Dividend Growth = Total Return on Investment.
So using the figures above, your return would be...
5.2% + 10% = 15.2%. You can’t ask for more than that!
You might be asking yourself why dividend growth is used to calculate returns. It’s because the dividend increase eventually forces the share price up in value as well.
Think about it for a second... if the share price didn’t increase when the dividend payment did, then the yield would keep getting larger and larger.
Eventually the market would realize that there is nothing wrong with the company and they would buy up the stock like crazy for the high dividend yield. I know I would!
This would cause the share price to increase and the yield to come down.
Now it’s not a perfect world (or should I say market) so the share price won’t follow exactly with the dividend increase but overtime it should average out.
Another useful tool for calculating returns and performance is yield on cost. Click here for a definition of high dividend yield on cost. This metric shows the powerful effect of dividend growth on yield over time.
Give yourself a pat on the back... you now know how to calculate dividend yield and returns!
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