Dividend Yield Ratio

The Dividend Yield ratio can be helpful when looking for income producing stocks. This ratio simply tells you how much dividends a stock is paying off for the price of the stock.

The formula looks like this

(Annual Dividends Per Share) / (Price Per Share)

Say stock XYZ is trading at $50 and its annual dividends are $3 then stock XYZ has a dividend yield of 6%. This is in addition to the appreciation of the stock.

Certain companies and ETFs pay off good dividends because it helps their tax situation. That can actually help the individual investor. In fact some studies suggest that dividends pay off as much as 97% of the profit the average investor can expect to make in the market.

It is important not to let the amount of dividends a company pays off destroy your judgment. Getting into a stock just because it pays high dividends can be a fatal move if the stock is fundamentally weak and crashes.

How to Use This Ratio

Many investors will use this ratio when they want to feel confident about the type of return they will get from their investment. An investor who want a return of at least 5% can invest into a stock which has a yield of 5% through their dividends.

It can be better for income investors to understand which stocks pay the highest income. This way they can get the highest income off of their investment.

Other Financial Ratios

This is not the only ratio that determines if a company is a good investment or not. Many investors will use a variety of indicators when buying a given stock. Here are a few.

Gordon Growth Model - This looks at the future rates of dividends

Average Collection Period - This tells you how long it takes for a company to collect their earnings

Payout Ratio - This looks at the percentage of earnings that are given to the investors as dividends