How to calculate a stock’s dividend yield
Double check it before investing in any stock
Double check it before investing in any stock
It’s easy for new investors to become befuddled with the bewildering array of data that’s available online. To make matters worse, different websites calculate common facts and figures in different ways.
Today I’m going to focus on some of the most popular ways of calculating a stock’s dividend yield in an effort to guide you through a small part of the morass.
Simply stated, a stock’s dividend yield is calculated by taking its dividend-per-share and then dividing it by its price-per-share. The result is then expressed in percentage terms.
For instance, Royal Bank (TSX:RY) paid its common shareholders $2.98 per share in dividends over the last 12 months and closed trading on June 22, 2015 at $77.40 per share. Its dividend yield that evening was 2.98 divided by 77.40 times 100%, which rounds to 3.85%. This figure is properly referred to as a trailing dividend yield because it uses historical dividend payments.
However, it is more popular to quote a stock’s indicated dividend yield which uses the current dividend rate instead of the historical one. As it happens, Royal Bank boosted its dividend twice over the last 12 months and currently pays $0.77 per share per quarter. To find its indicated dividend yield, just multiply the current quarterly rate by four and use the result ($3.08 per share) in the calculation. That is, 3.08 / 77.40 times 100%, which rounds to 3.98%.
If the bank had more recently announced that it will pay a different rate next quarter, the indicated yield would reflect the announced annualized rate rather that the annualized rate of the last quarterly dividend.
(Appropriate adjustments have to be made for stocks that don’t pay quarterly.)
Less commonly, you might want to consider a stock’s forward dividend yield which is based on analyst (or your own) estimates of the dividends it will pay over the next 12 months (or some other time period for that matter).
For instance, if the economy continues to hum along, Royal Bank might be expected to pay a dividend of $3.20 over the next 12 months. That would put its forward dividend yield at 3.20 / 77.40 times 100%, which rounds to 4.13%.
Usually the three different yields don’t vary much. But they can vary dramatically when the dividend has changed, or is expected to change, in a big way. For instance, a company might have recently announced that it will eliminate its dividend. As a result, it could have a very large trailing dividend yield but its indicated dividend yield would be 0%.
Naturally, dividends can change with little notice. They may happily go up, or possibly go down, depending on the circumstances. It’s one of the risks, and potential rewards, investors face. The yield quoted today may not be the one investors actually receive.
But it’s not just the dividend part of the equation that can change. Some investors like to compare a stock’s current dividend rate to the price they paid for it years ago. It’s something that’s commonly referred to dividend yield on cost.
For instance, a few lucky investors snapped up Royal Bank at $30.00 per share back in 2009 when the market was depressed. Their indicated yield on cost would be 3.08 / 30.00 times 100%, which rounds to 10.27%.
Dividend yield on cost is often a happily large figure that helps to demonstrate the power of holding dividend growth stocks for long periods of time. But few people talk about the unfortunate cases when companies eliminate their dividends and their yield on cost goes to 0%.
However, for most practical purposes, dividend yield on cost doesn’t have much value when making investment decisions today.
To make matters even more confusing, many online services update their figures at different times and may be a little slow in recognizing when a firm’s dividend policy has changed. So, even when you know which type of yield they’re using, it’s still important to be careful and double check it before investing.
Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.
The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.
My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.
Here’s the updated Safer Dogs of the TSX, representing the top yielders as of June 22. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase–barring some calamity.
|Name||Price||P/B||P/E||Earnings Yield||Dividend Yield|
|Potash Corp (POT)||$37.58||2.77||17.57||5.69%||4.99%|
|Bank of Montreal (BMO)||$74.17||1.44||11.94||8.37%||4.42%|
|National Bank (NA)||$47.51||1.76||10.58||9.45%||4.38%|
|Bank of Nova Scotia (BNS)||$65.15||1.69||11.33||8.83%||4.17%|
|Royal Bank (RY)||$77.40||2.16||11.91||8.40%||3.98%|
Source: Bloomberg, June 22, 2015
Price: Closing price per share
P/B: Price to Book Value Ratio
P/E: Price to Earnings Ratio
Earnings Yield: Earnings divided by Price, expressed as a percentage
Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage
As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)
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