Dividend yield

dividend yield

The annual dividends from a common or preferred stock divided by that stock's market price per share. If ExxonMobil common stock trades at a price of $50 per share, its $.92 dividend provides a dividend yield of ^$.92/_$50 , or 1.84%. This figure measures the current return on a particular common stock but does not take into account potential gains and losses in the security's value.

Case Study While dividend yield can be an important measure of the current income you are likely to receive from ownership of a particular common stock, it can also signal other possibilities, some of which aren't so good. For example, a very high dividend yield is almost certainly a sign that the dividend being paid is likely to be reduced or even eliminated. In the summer of 1996, Northeast Utilities was facing rising expenses as a result of shutting a nuclear power plant located in Connecticut. The firm's stock price, reflecting investor concern about the escalating costs, had declined 50% since the beginning of the year. The reduced stock price of $12 ⁷/₈ produced a dividend yield of 13.7% based on the utility's quarterly dividend of 44¢ per share. The high dividend yield stemmed from investors' expectations that the dividend would have to be reduced, perhaps substantially, because of lower earnings and cash flow related to the troubled nuclear plant. A common stock that has a dividend yield higher than the yield on long-term bonds indicates a need for caution.

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Dividend yield. If you own dividend-paying stocks, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share's current market price.

For example, if a stock whose market price is $35 pays a dividend of 75 cents per share, the dividend yield is 2.14% ($0.75 ÷ $35 = .0214, or 2.14%).

Yields for all dividend-paying stocks are reported regularly in newspaper stock tables and on financial websites.

Dividend yield increases as the price per share drops and drops as the share price increases. But it does not tell you what you're earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding stocks.