What Is A Dividend Yield In Stock Trading?

Posted by Nick Niesen on November 8th, 2010

A dividend yield in stock trading is the annual dividend payments by a company divided by the market cap of the company, which is the dividend per share divided by the price per share of stock for that company. This number is often expressed as a percentage. There are two types of dividend yield, those on preferred stock and those on common stock.

Preferred share dividend yields are given to owners of preferred stock, or shares. Dividend payments are stipulated by the prospectus. Preferred share owners calculate multiple yields which reflect the possible outcomes over the security life. The yield that is stated by the company may be different than the yields calculated by the investor.

Common stock dividend yields are different. With common stock, there is no stated dividend. Management of a company sets the dividends that are paid to owners of common shares, and these are usually in relation to the earnings of the company for that time period. Dividends are not guaranteed at a set rate, or even at all. Some dividend payments may be large, and others may be nonexistent. To calculate the dividend yield for common shares, the current yield is a better figure to use than future yield, which are not completely accurate. The current divident yield is gotten by taking the most recent full year dividend and dividing it by the current share price for that stock.

Dividend yields in stock trading refer to the amount of dividends for the past year divided by the price per share of the stock. Preferred stock offers better dividend yields and a guarantee that dividends will be paid. Common stock has no such guarantee. With common stocks, the dividends paid may vary if they are paid at all. Some companies and traders may try to accurately predict future dividends and the future dividend yield. This is not a smart move for most investors, as the stock market is basically unpredictable. By trying to predict future dividends, you could be setting yourself up for a loss if the market conditions change from what you thought they were going to be. Dividend yields are important financial tools that are used by investors in the stock market to help them invest in stocks that have a big potential for gains. Dividend yields are just one of the many analysis tools used by traders to minimize the risks when trading on the stock market.

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