If you own shares in a business, then it is likely that you have, at some point, been paid in dividends. Dividends are financial rewards paid to investors for their role in the success of a company. When you decide to invest in a business, you are taking a risk as there is a chance the business will fail and dividends are a reward for anyone who took that risk.
The dividend yield of a company refers to how much your investment returns for every year that you own shares. Generally speaking, high dividend yields indicate success for a company, though as we shall see, it isn’t always as simple as that.
So how do you work out the dividend yields of a company? How high should dividend yields be? And what exactly is a dividend?
We are going to explore the answer to these questions and more as we dive into, how to work your share dividend yield?
How can I work out my share dividend yield?
To calculate a company’s dividend yield, all you have to do is divide the annual dividends paid per share by the price per share and then times your answer by 100. This then gives the percentage of your investment that the company would pay out annually.
Typically, a yield between 2% and 4% is considered strong. Anything above 6% could be risky for reasons we will explore later. However, these numbers are by no means fixed and there are plenty of other factors that you should also take into consideration.
But for now, let’s first find out what exactly are dividends?
What are dividends?
Dividends are the financial distribution of a company’s profits to its shareholders.
All companies are funded in part by shareholders – people who invest their own money into the company with the hope and expectation that their investment will subsequently lead to the company’s success.
When a company makes a profit and has paid all of its workers and covered its expenses, the shareholders are then rewarded with dividends. These may be cash payments, further shares, or even company assets. The more shares you hold, the more dividends you receive. Any money that is left over is reinvested in the company.
Companies may choose to pay their dividends at regular intervals such as annually or quarterly, while others might pay one-off dividends in lump sums.
Dividends are generally more common amongst established companies that can afford not to reinvest their profits back into the business.
What are dividend yields?
Dividend yield is the amount a company pays out in a year per pound that a shareholder invests.
So if a company’s dividend yield is 5% and you own £1,000 worth of shares, you will get an annual payout of £50.
However, dividend yields are not fixed and can change on a regular basis. Dividend yields are linked to stock price, which fluctuates daily. If a company goes from having a high stock price to a low stock price, it will likely then reduce its dividend yield.
If you can’t find out the yield of a company you have shares in or want to buy shares in, you can calculate the yield yourself using the dividend yield calculation.
How to calculate the dividend yield of a company
If a company’s dividend yield isn’t listed, you can use the dividend yield formula:
- Dividend yield = (annual dividends paid per share / price per share) x 100
So, if a company you have shares in paid out £10 in dividends per share and its shares currently cost £100, the dividend yield would be 10%.
What is a good dividend yield rate?
Dividend yields between 2% and 4% are usually considered strong. Anything over 4% could be a great buy, but it could also be risky.
If a company has a dividend yield over 6%, then you should do some thorough research before making an investment as it could prove to be a bad idea.
In each case, it is best to find out what the dividend yield of the company has been over time to ensure that it maintains a level of consistency and stability.
How to find a company’s dividend payout
There are a few different ways that you can find out a company’s annual dividend payout, including:
- checking their annual reports. A company’s annual report should list the annual dividend per share.
- checking their most recent dividend payout. If a company pays its dividends quarterly, then simply multiply the most recent payout by four to find the annual dividend payout.
- trailing their dividend payouts. You can also find a more accurate reading of a company’s dividend payout by adding up its four most recent quarterly dividends.
You can also usually find the historical stock prices of a company easily online.
With both the historical stock prices and the dividend payouts, you can then work out the level of dividend yields over time which should indicate the consistency and stability of the company.
Which industries have high dividend yields?
While it can never be guaranteed and there are always unpredictable factors that can impact industries world, the following industries are well known for often having high dividend yields:
- Utility companies maintain much of the public infrastructure that is used on a daily basis and is always going to be needed. Therefore, the businesses that manage things like water, electricity, trains, etc., are usually stable investments with high yields.
- Communications have exploded in the last few decades and it seems unlikely that they are going to slow up any time soon. As digital and telecommunications become increasingly necessary for workplaces, the market is only going to get stronger.
- Property is a slightly controversial inclusion as there are plenty of examples of the housing market crashing. However, property markets generally rise and (excluding some well-known exceptions) are a safe investment.
Usually, it is the more established companies in settled industries that pay the best dividend yields. Whereas, less established companies are more likely to reinvest their profits into the company.
However, many people choose to take a chance with younger businesses because if it explodes and becomes successful, then the shares that were bought for very little will suddenly be worth a lot more.
Why is it important to know about dividend yields?
If you don’t have shares in any companies, then it is not important to know about dividend yields. And, let’s face it, most people fall into this category.
However, if you do have shares in companies (which is likely if you are reading this article), it is important to understand dividend yield as it helps you to know which stocks are going to offer you the highest returns.
Dividend yields also indicate the overall stability of a business and the market in general. There may be some industries that regularly fluctuate with their yields and others that remain more consistent. Understanding yields means you can decide whether you want to take a risk or play it safe.
Are high dividend yields good or bad?
If a business raises its dividend yield – by raising the dividend payout – then it usually means that the company is succeeding as it can afford to pay more to its investors.
By paying more to its investors, the company is rewarding those who help to fund it, whilst also encouraging more investment from people who are tempted by the high payout rates.
When this happens, it is often referred to as confidence in the market.
However, high dividends aren’t always good news. It can also mean that the company’s stock price has recently fallen. For example, if a company annually pays £5 per share and has a stock price of £100, then its dividend yield is 5%. However, if the stock price of that same company suddenly falls to £50, then the dividend yield will be 10%. The company will likely soon adjust its dividend payment, but the yield will be skewed until they do so.
Moreover, some companies attempt to attract investors by having a high dividend payout. Investors may be tempted by seeing the high payouts to choose to buy shares, which will subsequently push up the stock price. However, the payout and the stock value won’t last if the company isn’t stable and can’t keep up with high dividend payments.
There are myriad dividend investing strategies, but it is often a good idea to simply seek out companies that have consistent dividend yields, even if they are slightly lower.
What do low dividend yields mean?
Lower dividend yields mean less income, but they can also mean that the company behind them is more stable.
If you are looking to invest in a company with low dividend yields, then it is important to find out how long the yields have been low for. If they have only recently become low, then it may mean the stock price has recently fallen. But if they have consistently low for a period of time, then it is likely that the business is a stable investment.
Low dividend yields can also mean that a company is new. As we saw earlier, when new businesses start they are more likely to reinvest the company profits into developing the business further than they are to offer high dividend payouts.
Many people, therefore, choose not to invest in new businesses. However, you may be passing up on the next Apple or Google, so investing in new businesses can be the most financially rewarding option of all if you get lucky.
Summary
Dividend yields refer to the amount of money you get back in dividends in relation to the amount you originally invested. Good and stable dividend yields generally sit between 2% and 4%.
Dividend yields can be easily calculated by dividing the annual dividends paid per share by the price per share and then multiplying your answer by 100.
When choosing companies to invest in, look for good dividend yields but be wary if the yields look too high. It is better to opt for a company that maintains consistency but has slightly lower yields than it is to go for one that has only had high rates for a brief period of time.