The yield’s the thing
When dividend investors look to buy stock, it’s (almost) all about the yield. By determining the dividend yield of a stock, you can see what that stock is going to pay you if you buy it. The dividend yield alone is not enough information to decide whether or not you should buy a stock, but it is one of the major factors, and should be one of the first ways you use to screen potential stock investments. Unlike the dividend amount (or dividend payment, or just “dividend”) the dividend yield is stated on a annualized basis, which permits apples-to-apples comparisons, regardless of whether dividends are paid monthly, quarterly, or even annually. Here is how to calculate a stock’s yield.
Calculating the dividend yield
To figure out a stock’s dividend yield, you need two other numbers. You can get both of them from the TSX website. Let’s look at the stock price of BMO as an example. First, you need the current stock price. As I write this (I won’t publish this post for at least a few days) the price of BMO is $62.60. The next piece of information I need is the dividend amount. BMO has raised its dividend recently (yeah!) and it is now $.74 per quarter. Dividend amounts are usually expressed as the amount of the actual payments, so to get the annual amount, you have to multiply the amount by the number of payments over one year. In this case, BMO pays quarterly, so $.74 times 4 makes the annual amount of dividends $2.96.
To find the yield, cross multiply:
There is of course an easier way to find out the yield and that is simply to look it up – this number is very commonly reported on stock market websites, including the one where we got our other numbers from. The reason we went through the steps of calculating the dividend yield for ourselves is so we can see the two factors that affect dividend yield: a change in either the stock price or the dividend amount will drive the dividend yield either up or down. As such, the dividend yield changes daily because of changes in the price of the stock. This is why, on my Dividend Aristocrats page, I can’t include the dividend yield. If I wanted to do that, I would have to update the numbers every day.
When you know the dividend yield of a stock, you can decide whether or not you feel the yield is an adequate return for the amount of risk you are taking by buying a small part of that company. If the dividend is reliable (again, see my Dividend Aristocrats page) you can make a pretty good bet as to what return you can count on getting. The market will of course keep moving, and so you could either make or lose money on price changes, if you sell, but that isn’t what dividend investors have in mind when they buy. All things being equal, your return from the dividend should either remain constant or increase over time. To take a simple example, if you invested $10,016 in BMO today, you could buy 160 shares. From these shares, you would earn $472.75 over the next twelve months. If BMO follows the pattern they have set for the past 180 years, that dividend will increase over time, increasing your yield on your original investment. (It is important to know, however, that paying dividends is not a legal obligation; in theory, companies can lower or eliminate dividends at their discretion. In the case of BMO, after almost two centuries of uninterrupted dividends, I’ll take my chances.)
Before signing off for today, I would like to again emphasize that the dividend yield is NOT the only factor an investor should look at when deciding which stocks to buy. In fact, a very high yield is often the sign of a sick company, and one that should be avoided. I’ll be writing soon about what kind of yield you should look for when you’re considering buying dividend-paying stock.
Disclosure: I own BMO stock through ZWB.