- Dividend yield, also known as dividend to price ratio, is similar to an interest rate. The yield for a stock or mutual fund is the amount you receive annually in payouts expressed as a percentage of your investment.
- To calculate dividend yield, divide the amount of the annual dividend by the amount you paid per share. Multiply by 100 to express it as a percentage. If you paid $30 per share and receive $1.20 per share in dividends, your dividend yield is 4 percent--1.2/30*100. It may be easier with mutual funds to use figures for your total investment and total dividends rather than per-share figures. If your investment is $10,000 and you receive a dividend payout of $550, your dividend yield is 5.5 percent. Some companies issue stock dividends to conserve cash. Calculate the value of the shares you received as a dividend based on current market price to determine the dividend yield.
- Dividend yields vary widely and tell only part of the story. To fully assess how well an investment is performing for you, combine the value of the dividend with the change in share value to calculate your total return. If you start with $10,000 in a mutual fund and your equity increases to $11,000, your shares have appreciated $1,000. If you also receive $500 in dividends, your total return is $1,500, or 15 percent.
- Preferred-stock dividend yields typically are higher than those for common stock. When a company issues preferred shares, the dividend amount is a fixed rate the company is obligated to pay, whereas common-stock dividends are paid at the discretion of the company's board of directors. Preferred-stock dividends must be paid before common-stock dividends. Preferred stock is considered an alternative to bonds, and dividend yields follow a pattern similar to those of bonds. When interest rates rise, the value of preferred stock tends to fall, increasing the dividend yield. If interest rates fall, the share price is likely to go up, lowering the yield.
- The dividend-yield component of total return on investment is of primary concern to investors who want current income and may be of relatively little importance to a person whose investment strategy is focused on equity growth. Dividend payments for holders of common stock usually are dependent on earnings and are not guaranteed. Dividend income, whether from stocks or mutual funds, normally is taxed as ordinary income.
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