Understand what dividend yield is all about

Posted by alisonreid29 on March 6th, 2015

Every shareholder is delighted when the company whose shares they hold announces a dividend. People want to buy high dividend stocks because they are able to make additional money without selling off their shares. Dividends, as you would know, are announced by companies when they announce their yearly results. Shareholders also consider what is known as dividend yield because this has a bearing on their income.

For some, investment in shares is serious business. Indeed there are people who make their living from trading in the share market. When you interact with such hardcore investors, you will find that they tend to invest in two types of shares. There are those shares that they buy and sell short, i.e. they don’t hold on to these shares. And there are those shares that they buy and keep for the long term. These are typically high dividend stocks that generate plenty of income in the form of dividends. And all these stocks have high dividend yield.

Understanding what dividend yield is doesn’t require someone to know finance. It’s a simple enough concept that tells a shareholder how much they are getting for each dollar they have invested in a particular share. In other words, this concept tells the shareholders about the ROI that they get from their stockholding. The calculation of this concept is simple. It is

Annual dividend per share / current price per share

To put this in numerical terms, if two companies offer $1 dividend per share and the current share prices of these two companies is $20 and $50 respectively, then the yield for the former company is 5% and that of the latter company is 2%.

Now, how does this calculation help someone to choose between the shares of these two companies?

There are those investors who need some form of cash flow from their investment in shares. This cash flow can be easily generated when the investment is done in high dividend stocks with high dividend yield. In the example given above, any investor looking for steady cash flow would invest in the first company and not the second one.

Even if we discount this concept of yield, it still pays to invest in high dividend stocks. The money that is available at the end of every financial year is a bonus for the investors. And this income is generated just because someone decided to buy the stocks of a company and hold on to the stocks. For this reason, dividend incomes are taxable. It is a company’s way of thanking its shareholders for investing.

If you want to know more about high dividend stocks, there is plenty of information available for you. There are dedicated websites that not only explain about the stock market and its related terms, dividends and dividend yield and so on, but also keep you up to date on what is happening in the market. The more information you gather from these websites, more you can earn from your investment in the share market.

To know more about high dividend stocks and to understand about concepts like dividend yield, it is a great idea to gather knowledge from those who know.