In my last post I talked about dividends. What they are, how there the ultimate form of passive income and so on so make sure you check that post out!
Check my post on dividends here!
Our next step is the dividend Yield.
The dividend yield is the amount of money a company pays shareholders (over the course of a year) for owning a share of its stock. Which is it’s definition. We touched on this last time but i’ll reiterate a little to refresh your memory and create a good example for you.
It shows how much your getting return, on your investment.
If a company pays a dividend of £1.00 quarterly. You get 0.25p 4 times within that year but what does this cost initially? Because I’m good at maths i’m going to use the 2 different examples. One being if the share price was £100 (Shares can get this expensive like Amazon, Berkshire Hathaway and so on but usually they are cheaper than this)
but if I told you, with the same dividend (£1.00), the share price was £10. It’s simple which one you would choose, right? The £20. This is because the share has a better YIELD! That not a definition but a much more simplified example.
To find out a Dividend yield you need to do this equation
Example 1 — £1.00 Divided by 100= (Answer) x100 = 1% (DY)
Example 2 — £1.00 Divided by 10= (Answer) x100 = 10% (DY)
Which mean you get 1% of your money back each year in the first example and 10% in the second.
I would much prefer the 10% than 1, and I think I would know which one you would choose!
A stocks share price changes every day, every minute if you want to be precise. So just because you get 5% one day doesn’t mean you get it the next. Lets say the price changes to £11. Than the dividend yield is 9.09%. As the dividends and price of the stock change, so does the Yield.
Be careful! Just because a company has a high dividend yield doesn’t mean it’s a good investment. You need to consider the fundamentals of the business. What kind of profits a business has or is getting. Is the business going bust? and so much more, which I will be covering what I look for in a business before investing in it and what basics you should be looking for in later blogs, so stay tuned!
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