How to Calculate Your Returns From Dividend Stocks
Dividend stocks are an important part of a balanced investment portfolio. How do you calculate what your returns are from them?
To confuse the matter a little bit, corporations declare dividends not as a percentage but as so much per share. For example, if a company declares that next year’s dividend will be $1.00 per share, everyone holding 100 shares will receive $25.00 once per quarter. ($1.00 x 100 shares = $100; and $100 ÷ 4 quarters = $25)
This still does not tell you the dividend yield. To find this, divide the dollar value of the annual dividend by the current share price. For example, if today’s price per share is $40 per share, the $1.00 per share represents a yield of: $1.00 ÷ $40 = 2.5%.
So if you buy shares today at $40 per share, you will earn 2.5% per year from dividends. A few points to make about this:
- If you reinvest dividends, you get 2.5% compounded. Each quarter, instead of receiving $25 in cash, you buy additional partial shares. If the stock price next quarter is still $40 per share, the dividend buys you 62.5% of one share. That might not seem like a lot, but it adds up over time.
- The higher the stock price goes, the lower the current yield. For example, if the stock prices rises to $55 per share, that $1 per share is reduced to 1.8% ($1 ÷ $55 = 1.8%). However, you should calculate your yield based on the price per share that you paid when you bought stock, and not on what it becomes later.
- By the same mathematical reasoning, when the stock price falls, the dividend yield rises. For example, if the price per share falls from $40 down to $32, the dividend yield rises to 3.125% ($1 ÷ $32 = 3.125%).
The dividend yield should be a key ingredient in your evaluation of your portfolio and in the selection of companies whose stock you are thinking of buying. Some companies pay exceptionally high dividends and yet are considered very safe investments. This is not always the case, so if you just pursue the highest possible yield, it makes sense to perform a few fundamental tests first, and to determine whether or not it is safe to buy shares. Some of the strongest and highest-rated companies (by Standard % Poor’s) include:
Company Dividend *
Altria (M)) 6.2%
AT&T (T) 5.9%
H&R Block (HRB) 5.0%
Pfizer (PFE) 4.6%
* Dividend as of January 1, 2011
Never pick a stock based solely on dividend yield. But when all else is comparable, a higher dividend can work as a means for reducing your list of prospects.
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