3 Essential Dividend Calculations For Sound Investments
- Annual dividend yield: Annual dividend yield is the calculation of the percentage of dividend per share received relative to the stock price. This is a great barometer of the annual income you receive from investing in a stock. For example, if you invest in a $100 stock and it pays $4 per share in dividends. This is equal to a 4% annual dividend yield. If you plan on living off dividends, you want the annual dividend yield based on the cost you invested in shares to be the highest as possible.
- Dividend growth rate: The dividend growth rate for a dividend stock is very important. By investing in stocks that continually increase their dividend you essentially get a ‘raise’ every year for doing absolutely nothing. You can calculate the dividend growth rate on any annual timeframe. To do so, take the current year’s dividend per share divided by last year and subtract 1.
This will calculate the dividend growth rate compared to the prior year.
- Dividend payout ratio: The dividend payout ratio is a measure of how much a dividend stock pays in dividends relative to their earnings. You must consider the payout ratio of a stock because a high payout ratio means the company is retaining limited cash to be reinvested in the business. This can sometimes flash a red flag. If earnings decline, the dividend stock will have to decrease their dividend. That goes completely against good investing rules. You only want stocks that you know no matter what they will (at a minimum) maintain their dividend or increase it over time.