[Summary]
Dividend yield is an indicator of how much annual dividends are paid out relative to the stock price.
The calculation formula is as follows.
Dividend yield (%) = Annual dividend ÷ Stock price × 100For example, if the stock price is 2,000 yen and the annual dividend is 80 yen, the dividend yield is 4%.
Dividend yield is often used when looking for high dividend stocks. However, higher yields do not mean safer. There may also be hidden risks of worsening business performance, sharp declines in stock prices, and dividend reductions.
In this article, we will explain the meaning of dividend yield, how to calculate it, what to tell when it is high or low, and points that beginners should be aware of.
What is dividend yield?
Companies sometimes return a portion of their profits to shareholders as dividends.
Dividend yield is an indicator of how much dividend you can receive per year based on the amount invested.
Although it may be seen as similar to the interest rate on bank deposits, there is no principal guarantee with stock investments. If stock prices decline, you may end up losing money even if you receive dividends.
Dividend yield is a useful indicator, but it is only an entry point for looking at dividend efficiency.
Calculation method
The formula for calculating dividend yield is simple.
Dividend yield (%) = Annual dividend ÷ Stock price × 100For example, if the stock price is 1,000 yen and the annual dividend is 30 yen, it will be as follows.
30 ÷ 1,000 × 100 = 3%If the stock price is 5,000 yen and the annual dividend is 250 yen, the dividend yield is 5%.
250 ÷ 5,000 × 100 = 5%Even if the dividend is the same, if the stock price falls, the dividend yield will appear higher. Conversely, when the stock price rises, the dividend yield appears low.
What is good about a high dividend yield?
Stocks with high dividend yields tend to provide you with dividend income while you hold them.
Dividends are paid out once a year, twice a year, or quarterly, depending on the company. Therefore, if you hold it for a long time, it will be easier to have a sense of regular income.
Additionally, high-dividend stocks tend to attract the attention of pension funds and long-term investors. When stock prices are down, you may want to buy a stock because of its dividend yield.
Additionally, you can reinvest the dividends you receive to take advantage of compound interest. It is a concept that is compatible with long-term investment because it can create a situation where dividends generate further dividends.
Beware of too high dividend yields
Just because a stock has a high dividend yield doesn't necessarily mean it's an attractive investment.
Particular attention should be paid to stocks whose yields have suddenly increased.
Dividend yields automatically look higher when stock prices fall. In other words, stock prices may simply be plummeting due to poor business performance or concerns about the future.
When looking at high dividend stocks, check the following points:
- Is business performance stable?
- Is there an operating cash flow?
- Is the dividend payout ratio too high?
- Has the amount of borrowing increased excessively?
- Is there no risk of dividend reduction?
If you judge based on dividend yield alone, you may fall into the so-called high dividend trap.
Understanding dividend cut risk
Dividends are not guaranteed income.
If a company's performance deteriorates, dividends may be reduced. This is called a dividend reduction.
Furthermore, if business performance worsens, dividends may drop to zero.
If a dividend cut is announced, not only will dividend income be reduced, but the stock price may also fall. Therefore, when investing in dividends, it is important to look at not only the yield but also whether the dividend can be continued.
A beginner's perspective
For beginners, it is important not to choose stocks based solely on dividend yield.
Dividend investing will be easier to judge if you consider the following items:
| Check items | Reason to watch |
|---|---|
| Achievements | Without profits, it is difficult to continue paying dividends. |
| cash flow | See if you're actually making cash |
| Dividend payout ratio | See what percentage of profits goes to dividends |
| financial security | Check whether the borrowing burden is too heavy |
| Past dividend trends | Check if the company is likely to reduce its dividend |
Also, dividend investing is compatible with NISA and long-term holding. By holding your shares for a long time while reinvesting the dividends, you can easily use them as a foundation for asset formation.
common misconceptions
High dividend stocks are not necessarily safe.
Even with high dividends, stock prices can fall due to poor business performance or economic recession. In particular, stocks that are sensitive to the economy may have high dividends during good economic times, but profits may drop significantly during recessions.
Also, dividends alone do not tell you the total return on your investment.
Investment performance requires considering dividend income and stock price fluctuations together. Even if the dividend is high, you may incur a loss if the stock price falls significantly.
Summary
- Dividend yield is the ratio of annual dividends to stock price
- The calculation formula is "annual dividend ÷ stock price x 100"
- High dividend stocks make it easier to earn dividend income
- However, too high a yield may hide the risk of a dividend cut.
- Check not only yield but also performance, cash flow, and financials
Beginners should first be aware of whether the dividends will continue, rather than making judgments based solely on high yield numbers.