The dividend yield formula is a simple math calculation used to determine the percentage return of a stock based on its price and the dividend that is paid from it. The dividend yield formula is used by investors to see if a stock is a good value to buy and hold based on the dividend return.
The formula is very simple:
Dividend yield = D/P.
D is dividends paid for a given period of time and P is the initial price for the period of time that the dividend has been paid. When you factor in P above, do not consider the price that you paid for the stock. Use the value of the stock during the time that the dividend was paid.
A lower percentage of dividend yield means three things typically:
- A lower percentage yield means either the company is struggling and needs more cash flow
- They are holding more money to plan for growth in the short term
- Or, they fear that things may get worse for business, so they want more cash on hand.
The dividend yield formula is important for someone who is relying on dividend investments for their income, or who needs to maximize returns for a short period of time.
Dividend Yield Formula Examples
It may be helpful to take a look at a few companies to see how the dividend yield percentage works with two “blue chip” companies.
BP Dividend Yield Formula
Let’s look at BP first. BP pays out dividends quarterly. The dividend is 48 cents per share per quarter. The yield is listed as 4.48%. Taking 100 (100 percent) times .48, the dividend and then dividing by 4.48, the percentage yield, gives you the number $10.71. Multiply that by 4 and you get $42.86 a share. That was the stock price of BP the last time they paid dividends. (The price right now is $42.78 per share).
One more way to look at the 4.48 percent dividend yield is that you would have to hold the stock for 22.32 quarters (5.58 years) to get 100% return on your investment- if the price of the stock and the dividend stayed the same without regards to income taxes or the return on the stock when you sell it.
GE Dividend Yield Formula
Let’s take a look at another example, General Electric. GE’s dividend is 17 cents per share per quarter and their dividend yield percentage is 3.06 percent. When you multiply 100 times .17 (dividend) and divide it by 3.06 (dividend yield), you get roughly 5.55. GE’s stock price was approximately $22.20 at the time of the last dividend. (The price of GE at the time I write this article is $22.19). If you hold the stock and all the numbers stay the same, it would take you 32.67 quarters (8.16 years) to get back your investment via dividend.
Please note this article is not investment advice, nor endorsement of the stocks mentioned.
This article is a part of our free Stocks that Pay Dividends Training Course. Check it out now!