Understanding Dividends and Yields
When you find a great growing company in which to invest, if it pays a dividend, that’s the icing on the cake. To assess the size of the dividend, check out the “dividend yield,” which expresses the relationship between the stock’s price and the amount of its annual dividend.
Consider Boeing. It was recently trading around $240 per share, paying out $1.42 per quarter ($5.68 per year) as a dividend. Take $5.68 and divide it by $240 and you’ll get 0.0237. Multiply that by 100 and you’ve got a dividend yield of 2.37 percent. If you pay $240 for a share of Boeing today, you’ll earn 2.37 percent per year on your investment, just from dividends alone.
Dividends of healthy companies tend to increase over time, delivering additional value to shareholders. Companies rarely decrease or eliminate their dividends, as that would make investors unhappy. Like many companies, though, Boeing was challenged in the recent recession, and its dividend growth stalled. Its payout has more than tripled since 2011, though, and it was hiked by 30 percent for 2017.
A dividend will hold steady for months or years at a time. But the yield usually fluctuates daily since it’s tied to the stock’s price. As a stock price rises, the yield falls, and vice versa. If Boeing shares, for example, suddenly doubled in price to $480, the yield would be halved, to about 1.2 percent ($5.68 divided by $480 is 0.012).
You can find some hefty yields among companies whose stock prices have tumbled — but be careful. If you spot an unusually high dividend, it may be because the company is in trouble. Make sure the trouble seems temporary, not permanent — as that fat dividend yield could end up reduced or even eliminated.
Also understand that not all companies pay dividends. Younger or quickly growing companies prefer to plow their extra cash back into operations.
For a long list of recommended dividend-paying investments, you can try our “Motley Fool Income Investor” service free for 30 days via www.fool.com/services.