Cheat Sheet:

  • Dividend yield tells you how generous a company’s dividend is.  You can use it to comparison shop.

  • The higher the company’s dividend yield, the more cash you’ll receive for every dollar you invest.

  • Older investors often use high dividend yield stocks as a steady source of income.

How do you know if a stock pays out high or “generous” dividends? Look at the company’s “dividend yield.” The higher the company’s dividend yield is, the more dividends you’ll receive for every dollar you’ve invested. This makes it easy to comparison shop.

How do you calculate dividend yield?

DY = (dividends per share paid out for the last year) / (price per share)

So if a company paid out a total of $3 per share in dividends the last four quarters and its share price is $100, its dividend yield is 3%. If another company with the same share price paid $6 dividend per share, its dividend yield is a more generous 6%.

If dividends are important to your investment decision – i.e., if you want to collect cash from your stocks while you own them – you should choose companies with high dividend yields.

Why wouldn’t everyone want that? If you’re approaching retirement, dividend stocks could be right for you because they provide a steady source of income. Younger investors, on the other hand, usually prefer to invest in growth stocks or a mix of growth and dividend stocks because the appreciation in stock price tends to exceed dividend payments over a longer time horizon.

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