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Dividend yield is a fairly simple metric to calculate. Here is the formula for finding the dividend yield of any stock or REIT:
Dividend Yield = Annual Dividend Per Share / Market Price Per Share X 100%
Knowing the dividend yield of a security can help investors in a few key ways, such as:
- It helps investors assess the income potential of an investment, especially in dividend-paying stocks or income-focused investments like bonds
- A higher dividend yield indicates a potentially higher income relative to the investment's price
- Dividend yield is inversely related to a stock's price. If the stock price rises while the dividend remains the same, the yield decreases, and vice versa
- Investors often consider both the dividend yield and the stability of dividend payments when evaluating the attractiveness of income-generating investments
- However, a high dividend yield could also indicate that the market has concerns about the company's financial health or growth prospects, leading to a lower stock price
Dividend Yield Pitfalls To Avoid
Solely relying on dividend yields can be unreliable, as there are different reasons why a stock or REIT may have an exceptionally high dividend yield.
For example, a distressed stock with a declining price is likely to have a high dividend yield. However, investing in such a stock may not be profitable in the long run, as the declining price can eat into the gains generated through dividend payments.
Furthermore, REITs typically have higher dividend yields than most stocks, as REITs are mandated to distribute at least 90% of their net income as dividends. It may not be entirely evident whether a public company is a REIT or not, which is why it is important to research prospective stocks before investing.
Analyzing the financial stability of prospective stocks is crucial, as dividend yield alone cannot show the full picture of the company.
