Everyone seems to be feeling the pinch from the current economic conditions. Not even large companies are immune as some of them are being forced to cut the portion of company earnings they pay to shareholders as dividends. Cutting a dividend is never a positive thing and it will affect certain financial measurements relevant to the company, such as its dividend yield.
Dividend yield reflects how much money a company pays in dividends in relation to the company stock price. This key ratio shows the shareholder the return on his or her investment in the stock. Knowing how much cash flow they get for their investments provides individuals with an easy way to determine when reallocations are necessary.
Dividing annual dividends per share by stock price per share results in the dividend yield figure. If an investor requires a certain amount of cash flow from investments, the decision is usually made to purchase stocks that pay stable and relatively high dividend yields. This will increase the chances that the cash flow meets the investor’s needs even during periods when the company is not growing.
Examining the dividend yield makes it clear that looking at stock price is not the only way to measure a company’s financial stability. If two companies pay $1 per share in annual dividends but the share price of one is $20 and the price of the other is $40, the dividend yield of the company with the lower share price is actually higher. If these two companies are equivalent in other ways, this is the company in which the individual would be more likely to invest.
Individuals should research financial ratios like dividend yield prior to investing in dividend-paying stocks. They should also review the past history of dividend payments, amounts, and dividend yield figures over a several year period. Though there is no guarantee that a dividend will be paid in the future, history will provide some type of idea regarding the trend.
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