In partnership with

DISCLOSURE: THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I GET A COMMISSION IF YOU DECIDE TO MAKE A PURCHASE THROUGH MY LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.

RIIQ Pro Newsletter

More robust content and deep insights & analysis related to Investing reserved for Raising InvestorIQ premium subscribers

Perfect Your Dividend Strategy!

Dividend Yield - the investor’s trusty friend

Deep-Dive

INTRO

Dividend-bearing assets pay you on a regular basis no matter if the stock investment itself is on the upturn or in decline. Analyzing the dividend yield is key to perfecting your dividend strategy and more adequately evaluating investment opportunities.

If you're into stock investing, this term must sound like sweet music to your ears, like a promise of returns on your investment. But for those still wondering what it is, don’t worry. We'll break it all down together, and you’ll see that the dividend yield might just become your new favorite metric for evaluating the stocks you invest in.

What is it?

The dividend yield is a simple but powerful financial ratio. It’s calculated by dividing a company’s annual dividend per share by its current share price. In other words, it's the percentage you receive in dividends for every dollar or euro you invest in a stock. If a company pays a dividend of $2 per share and the share price is $40, then the dividend yield is 5%.

Not too shabby, right? It’s like asking yourself, "If I put my money into this stock, what kind of little annual (or quarterly) gift will I get in return?" That gift is the dividend, and the dividend yield tells you just how generous that gift is relative to what you paid for the stock.

The term “gift” may be a misnomer, but it's actually a share in the company's profits, which you've indirectly helped to create by choosing to invest your money in it to support its activity. It's a return on investment (ROI), in the same way that you receive rental income when you choose to invest in a rental property!

WHY SHOULD YOU CARE ABOUT DIVIDEND YIELD?

Now that you know what it is, you might be wondering why you should care. Here are a few reasons that should grab your attention. The dividend yield can give you an idea of how much a company likes to share its profits with its shareholders.

Some companies, like those in stable sectors (think utilities, food), tend to pay regular and high dividends. This can be a sign that the company is mature, with stable profits and less of a need to reinvest in growth. The most convincing examples are McDonald’s and Coca-Cola Company ($MCD and $KO), which have been distributing a portion of their profits non-stop for decades, with a rising dividend.

Below is the historical distribution level in euros per share for Coca-Cola and McDonald's for the last 5 years.

THE POTENTIAL PITFALLS

So who doesn’t love the idea of receiving a check from time to time without lifting a finger? That’s what dividends offer you—a passive income. For investors seeking regular returns, a good dividend yield can be a comforting source of income, especially in retirement.

For Those Who Seek Unbiased News.

Be informed with 1440! Join 3.5 million readers who enjoy our daily, factual news updates. We compile insights from over 100 sources, offering a comprehensive look at politics, global events, business, and culture in just 5 minutes. Free from bias and political spin, get your news straight.

Join for free today!

Even in volatile markets, dividends provide a cushion of security. In spite of share price fluctuations, as long as the company continues to pay dividends, you still have a positive return on your investment. Having a diversified portfolio of solid dividend stocks can be a real shield against crises and downturns in cyclical stocks, and protect the overall performance of your investments!

But like any good story, there are a few pitfalls to watch out for. A high yield can seem enticing, but it might also be hiding less pleasant surprises. A very high yield might indicate that the share price has dropped significantly. And if the share price is plummeting, it might be because the company is in trouble. In that case, the high dividend might not last long.

Imagine investing in a stock for its attractive dividend, only to see the company cut that dividend a few months later. It’s also essential to check if a company can maintain its dividend payments. The payout ratio (the percentage of profits distributed as dividends) is a good indicator. A payout ratio that’s too high might mean the company is paying out more in dividends than it’s making in profits, which isn’t sustainable in the long term.

Taking the same example with Coca-Cola and McDonald’s below, we see that our two flagship companies distribute a majority of their income, with McDonald's looking a little more cautious though with a relatively lower payout ratio. Distribution management is key for a company; it's all about keeping the right level of cash reserves, and not distributing everything to allow for ability to cope with any potential bad weather in the future!

HOW TO USE IT IN YOUR INVESTMENT STRATEGY?

Now that you understand the basics, let’s move on to how to use dividend yield to guide your investment decisions. Read more below…

For more robust and meaningful Investing insight & analysis, consider subscribing to RIIQ Pro, our premium newsletter:

• A company-specific Deep-Dive Analysis (provided weekly)

• A detailed write-up of a RIIQ Key Investing Insight (provided weekly)

• RIIQ Top 10 Watchlist - a list of the top 10 companies being monitored and evaluated heavily due to varying factors, along with details of why they may be in our top 10 (provided monthly)

• BONUS: A FREE download of Legendary Investor Insights. 10 pieces of practical wisdom from legendary investors like Warren Buffett, Peter Lynch, Charlie Munger, and many more.

Sign up now for limited-time offering of only $9.99 per month.

Subscribe to RIIQ Pro to read the rest.