Dividend yield refers to the payout of dividend price ratio on a given company’s stock. It is simply determined by taking the yearly dividend payment total and dividing it by the cost for each share. This dividend yield is commonly given out as a percentage. The reciprocal of dividend yield proves to be the price to dividend ratio.
Dividend yields vary depending on whether a stock is a preferred stock or a common stock. With preferred shares, these dividend yields are outlined specifically in the stock’s prospectus. A company will generally call such a preferred class of stock by the name first given to it, which included the yield based on this initial price. This might be a five percent preferred share. Since the pricing of preferred stock shares go up and down with the dictates of the market, the current yield will vary with the changes in price.
Preferred share holders have a variety of yields that they can figure up. These depend on the eventual disposition of their preferred share security. Besides the current yield formula of amount of dividend per price of preferred share, there are present value yields and a yield to maturity. These other yields only apply to those investors who purchase preferred stock shares after they have been issued or who choose to hold them until the reach the stated maturity date.
Preferred share dividends are almost always higher than the dividend yields on common stock shares.
Common stock shares have a dividend yield that differs entirely. With such common shares, the dividend amount is not guaranteed, and could vary from one quarter to the next. These dividends that are given to you, the common stock holder, are determined by the company’s management. As such, they depend on the earnings of the company for the given quarter.
With common stocks, you can not be assured that dividends will be paid in the future that match dividends paid previously, or that these dividends will be paid period. Since it proves to be so challenging to correctly predict future dividends, the figures used in determining dividend yields are the present dividend yields. This means that the present dividend yield is always determined by dividing the most current full year’s dividend by the present share price.
Dividend yields can have a major impact on how much money a stock makes for its owners over time. Dr. Jeremy Siegel is a well respected professor of investments who has determined conclusively with his research that ninety-nine percent of all after inflation gains that investors realize with stocks come from only dividends that are reinvested. Reinvestment of dividends means that the dividend yield amounts are simply taken and used to purchase more shares of the stock, instead of paying them out as cash to the share holder’s account. This allows for investors to compound the number of shares that they own in a company over time.