Investing in stocks is one way to take a partial ownership in a company. You can make a return on your investment in two ways: through share price appreciation (read: the stock price goes up) or through dividends. Dividends are a payment to all stock owners of a company and are usually paid on a per-share basis. Some investors are only interested in stocks that offer a dividend. According to Investopedia, "Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position." The challenge is comparing dividend stocks. The best way is by calculating the dividend yield and the total return yield on the stock.
Calculate the dividend yield for an actual example of stock. Dividend yield equals dividend per share divided by share price. Let's say XYZ stock had an initial price of $50 per share and paid a quarterly dividend of $0.25 per share, and that at the end of one year the ending share price is $100. In our example, the annual dividend per share is $0.25 per share multiplied by four quarters in a year (which equals $1) divided by the initial share price of $50. One dollar divided by 50 equals .02, or 2 percent.
Calculate the total yield. The total yield is the capital gain plus the annual dividend divided by the initial investment. A capital gain is the profit from the sale of an asset (in this case, stock). To calculate the capital gain, subtract the ending price of the stock from the initial price. The ending price in our example is $100. Take away the $50 initial price, and you get $50 for the capital gain. Now add the annual dividend (which is $1) to the capital gain (which is $50) and divide by the initial investment (which was $50) in order to get the total yield: $50 + $1 = $51. As a percentage, $51 is 2 percent higher than the initial price of $50. So the dividend capital gain yield is 2 percent. The share price capital gain (a $50 gain on an initial share price of $50) is 100 percent.
Video of the Day
Compare the total yield and dividend yield for each stock you are considering investing in. In general, you want the stock with the highest dividend yield and the highest total yield.