Un­der­stand­ing Div­i­dends and Yields

The Saratogian (Saratoga, NY) - - BUSINESS -

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.

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