You may purchase shares of stock within a corporation to improve your long term living standards. Capital gains alongside cash dividends from stocks, form your total returns as part of this wealth creation process. Capital gains describe a positive advance in share prices, while dividends relate to investment income while you hold stock. Recognize that stock market losses are always a possibility. Dividend yield, however, can never be a negative amount.
Identification
Corporations pay out dividends to return a portion of their business earnings to shareholders. As a shareholder, your investment carries limited liability status. This means that you can only stand to lose the amount of money that has been invested into the business. You are not obligated to make any additional payments into the business for any reason. Therefore, your total cash dividends can only range between zero and infinity. As a shareholder, your dividends will never be a negative amount and you will never be forced to return dividends back to the company.
Features
Dividend yield is taken as a percentage. To calculate dividend yield, you would divide a corporation's expected annual dividend payment by its current share price. Dividends are typically quoted and paid quarterly, so you must multiply the quarterly dividend amount by 4 before arriving at dividend yield. Therefore, $100 Stock X that pays out $1.25 in quarterly dividends, or $5 in annual dividends, features a 5 percent dividend yield ($5 / $100). If you invest $1,000 into Stock X, you can expect to receive $50 worth of dividends over the next year.
Considerations
To calculate total returns, you would add dividends to capital gains. For example, you may buy Stock X at $100 and sell it for $120 over the next 13 months. During that time, you would collect $5 worth of dividends. Your total returns would then be $25 per share, for a 25 percent total return on the investment. Although dividend yields cannot be negative, your total returns may fall into the red when share prices decline significantly. If Stock Y pays out a 1 percent dividend yield, your total return would be negative when Stock Y's share price falls by more than 1 percent.
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Warning
Corporations are under no legal obligation to pay dividends. Because of these terms, a corporation can reduce or eliminate its dividends due to financial distress. Low amounts of cash, falling sales and high levels of debt often foreshadow dividend cuts and bankruptcy. You can order an annual report from a corporate investor relations department to analyze financial statements and anticipate their effect on dividend policy.
Strategy
Diversify your stock portfolio as a strategy to secure dividend income. For example, you may buy dividend-paying oil, transportation and pharmaceutical stocks. Your oil and transportation stocks will perform according to energy prices. Meanwhile, drug companies should generate stable profits and dividends regardless of the economic outlook. As a smaller investor, you may purchase stock mutual funds for automatic diversification. Mutual fund shares carry claims to dozens of stocks within a large asset pool.
