Dividend yield

From Academic Kids

The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It's often expressed as a percentage.

Contents

Example

General Electric Co. ([1] (http://finance.yahoo.com/q/ks?s=GE)).

  • Share price: $36.00
  • Annual dividend: $0.88
  • Dividend yield: 2.44% (0.88/36.00)

History

Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is underpriced, whereas a low dividend yield is considered evidence that the stock is overpriced.

The term fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.

The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some bearish investors as indicative that the market is still overvalued.

Dow Industrials

According to Sridhar R. Reddy, the dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has flucutated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%.

With the decrease emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.

S&P 500

In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just 1.4% during 1998. Because stock prices increased faster than dividend payments from earnings. And public company earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings.

Stock returns

If the dividend yield stays at 4%, while the stock price increases (capital gain) is 6% per year (which means that the dividend payment increases at the same speed as the stock price increse, by 6% a year), the return on the portfolio is 10% (6% + 4%) per year.

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