What Is Dividend Yield? - Definition & Calculation

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  • 0:03 Understanding Dividend Yield
  • 0:59 Calculating Dividend Yield
  • 1:47 Higher Dividend Yields
  • 2:49 Stock Values
  • 3:17 Portfolio Yield
  • 4:16 Lesson Summary
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Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

In this lesson, you'll learn about dividend yield while performing calculations with a hypothetical stockholder's portfolio. When you've finished with the lesson, use our online quiz to see how well you understood the formulas for dividend and portfolio yields and how to use them.

Understanding Dividend Yield

Elizabeth recently inherited some stocks from her great-aunt, Lucy. Lucy was a schoolteacher who worked during the summer painting homes and used the money she earned to purchase several stocks. Lucy planned on using her investment income to supplement her pension during retirement.

Lucy left Elizabeth 100 shares of stock each from the following companies: LOG Corporation, CKC Company, and SLC Holdings. Each year, Elizabeth expects to receive $3 for each share she owns from LOG Corporation, $7.50 for each share she owns from CKC Company, and $1 for each share she owns from SLC Holdings. Although we know Elizabeth is receiving these amounts from each of her stocks, how much is she receiving as a percentage of the value of her stock?

The answer is dividend yield. Dividend yield is a ratio that shows annual dividend income relative to the company's current share price.

Calculating Dividend Yield

Elizabeth's stocks are priced differently. Let's take a look: LOG Corporation is priced at $50 per share, CKC Company is priced at $150 per share, and SLC Holdings is priced at $10 per share.

Let's use the formula shown below to calculate the dividend yield for Elizabeth's inherited stocks:

Dividend Yield = Annual Dividend per Share / Price per Share

LOG Corporation:

Dividend Yield = $3 / $50

Dividend Yield = 6%

CKC Company:

Dividend Yield = $7.50 / $150

Dividend Yield = 5%

SLC Holdings:

Dividend Yield = $1 / $10

Dividend Yield = 10%

Higher Dividend Yields

It's important to note that having while having a higher dividend yield may seem more enticing from an income standpoint, companies that have higher dividend yields may have more risks than other companies, but those risks are outside of the scope of this lesson. Also, it's important to understand that dividends are not guaranteed.

Let's take a closer look. Elizabeth's highest yielding stock is SLC Holdings. But what if I told you SLC Holdings' dividend yield was 5% just last week, and the annual dividend per share was $1?

Let's calculate the approximate price per share as of last week using the dividend yield formula.

Dividend Yield = Annual Dividend per Share / Price per Share

5% = $1 / Price per Share

$20 = Price per Share

Using this formula, we see that last week's price per share was $20, while this week it dropped to $10! This is why we should always look at the many other variables in evaluating stocks, rather than solely at dividend yield.

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