What Is a Stock?

A stock (also known as "shares" or "equity") is a type of security that signifies

proportionate ownership in the issuing corporation. This entitles the stockholder
to that proportion of the corporation's assets and earnings.

Stocks are bought and sold predominantly on stock exchanges, though there can
be private sales as well, and are the foundation of nearly every portfolio. These
transactions have to conform to government regulations which are meant to
protect investors from fraudulent practices. Historically, they have outperformed
most other investments over the long run. These investments can be purchased
from most online stock brokers.

KEY TAKEAWAYS

 A stock is a form of security that indicates the holder has proportionate

ownership in the issuing corporation.
 Corporations issue (sell) stock to raise funds to operate their businesses.
There are two main types of stock: common and preferred.
 Stocks are bought and sold predominantly on stock exchanges, though
there can be private sales as well, and they are the foundation of nearly
every portfolio.
 Historically, they have outperformed most other investments over the
long run.
Understanding Stocks
Corporations issue (sell) stock to raise funds to operate their businesses. The
holder of stock (a shareholder) has now bought a piece of the corporation and
has a claim to a part of its assets and earnings. In other words, a shareholder is
now an owner of the issuing company. Ownership is determined by the number
of shares a person owns relative to the number of outstanding shares. For
example, if a company has 1,000 shares of stock outstanding and one person
owns 100 shares, that person would own and have claim to 10% of the
company's assets and earnings.

Stock holders do not own corporations; they own shares issued by corporations.
But corporations are a special type of organization because the law treats them
as legal persons. In other words, corporations file taxes, can borrow, can own
property, can be sued, etc. The idea that a corporation is a “person” means that
the corporation owns its own assets. A corporate office full of chairs and tables
belong to the corporation, and not to the shareholders.

This distinction is important because corporate property is legally separated from

the property of shareholders, which limits the liability of both the corporation and
the shareholder. If the corporation goes bankrupt, a judge may order all of its
assets sold – but your personal assets are not at risk. The court cannot even
force you to sell your shares, although the value of your shares will have fallen
drastically. Likewise, if a major shareholder goes bankrupt, she cannot sell the
company’s assets to pay off her creditors.

Stockholders and Equity Ownership

What shareholders actually own are shares issued by the corporation; and the
corporation owns the assets held by a firm. So if you own 33% of the shares of a
company, it is incorrect to assert that you own one-third of that company; it is
instead correct to state that you own 100% of one-third of the company’s shares.
Shareholders cannot do as they please with a corporation or its assets. A
shareholder can’t walk out with a chair because the corporation owns that chair,
not the shareholder. This is known as the “separation of ownership and control.”

Owning stock gives you the right to vote in shareholder meetings, receive
dividends (which are the company’s profits) if and when they are distributed, and
it gives you the right to sell your shares to somebody else.

If you own a majority of shares, your voting power increases so that you can
indirectly control the direction of a company by appointing its board of directors.
This becomes most apparent when one company buys another: the acquiring
company doesn’t go around buying up the building, the chairs, the employees; it
buys up all the shares. The board of directors is responsible for increasing the
value of the corporation, and often does so by hiring professional managers, or
officers, such as the Chief Executive Officer, or CEO.

For most ordinary shareholders, not being able to manage the company isn't
such a big deal. The importance of being a shareholder is that you are entitled to
a portion of the company's profits, which, as we will see, is the foundation of a
stock’s value. The more shares you own, the larger the portion of the profits you
get. Many stocks, however, do not pay out dividends, and instead reinvest profits
back into growing the company. These retained earnings, however, are still
reflected in the value of a stock.

Common vs. Preferred Stock

There are two main types of stock: common and preferred. Common
stock usually entitles the owner to vote at shareholders' meetings and to receive
dividends. Preferred stockholders generally do not have voting rights, though
they have a higher claim on assets and earnings than the common stockholders.
For example, owners of preferred stock receive dividends before common
shareholders and have priority in the event that a company goes bankrupt and is
liquidated.
The first common stock ever issued was by the Dutch East India Company in
1602.
Companies can issue new shares whenever there is a need to raise additional
cash. This process dilutes the ownership and rights of existing shareholders
(provided they do not buy any of the new offerings). Corporations can also
engage in stock buy-backs which would benefit existing shareholders as it would
cause their shares to appreciate in value.

Stocks vs. Bonds

Stocks are issued by companies to raise capital in order to grow the business or
undertake new projects. There are important distinctions between whether
somebody buys shares directly from the company when it issues them (in
the primary market) or from another shareholder (on the secondary market).
When the corporation issues shares, it does so in return for money.

Bonds are fundamentally different from stocks in a number of ways. First,

bondholders are creditors to the corporation, and are entitled to interest as well
as repayment of principal. Creditors are given legal priority over other
stakeholders in the event of a bankruptcy and will be made whole first if a
company is forced to sell assets in order to repay them. Shareholders, on the
other hand, are last in line and often receive nothing, or mere pennies on the
dollar, in the event of bankruptcy. This implies that stocks are inherently riskier
investments that bonds.

investopedia.com/terms/s/stock.asp

What Is a Dividend?
A dividend is the distribution of reward from a portion of the company's earnings
and is paid to a class of its shareholders. Dividends are decided and managed by
the company’s board of directors, though they must be approved by the
shareholders through their voting rights. Dividends can be issued as cash
payments, as shares of stock, or other property, though cash dividends are the
most common. Along with companies, various mutual funds and exchange
traded funds (ETF) also pay dividends.

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What Is A Dividend?
Basics of a Dividend
A dividend is a token reward paid to the shareholders for their investment in a
company’s equity, and it usually originates from the company's net profits. While
the major portion of the profits is kept within the company as retained earnings,
which represent the money to be used for the company’s ongoing and future
business activities, the remainder can be allocated to the shareholders as a
dividend. However, at times, companies may still make dividend payments even
when they don’t make suitable profits. They may do so to maintain their
established track record of making regular dividend payments.

The board of directors can choose to issue dividends over various time frames
and with different payout rates. Dividends can be paid at a scheduled frequency,
like monthly, quarterly or annually. For example, Walmart Inc. (WMT) and
Unilever PLC ADR (UL) make regular quarterly dividend payments. Additionally,
companies can also issue non-recurring special dividends either individually or in
addition to a scheduled dividend. Backed by strong business performance and
an improved financial outlook, Microsoft Corp. (MSFT) declared a special
dividend of $3.00 per share in 2004, which was way above the usual quarterly
dividends in the range of 8 to 16 cents per share.

KEY TAKEAWAYS

 Dividends are payments made by publicly-listed companies or funds as a

reward to investors for putting their money into the venture. They can be
paid as cash or in the form of stock.
 Announcements of dividend payouts are generally accompanied by a
proportional increase or decrease in a company's stock price.
 Investors can use models, such as the dividend discount model or Gordon
growth model, to find dividend-paying instruments.
Dividend Paying Companies
Larger, established companies with more predictable profits are often the best
dividend payers. These companies tend to issue regular dividends as they seek
to maximize shareholder wealth in ways aside from normal growth. Companies in
the following industry sectors are observed to be maintaining a regular record of
dividend payments: basic materials, oil and gas, banks and financial, healthcare
and pharmaceuticals, and utilities. Companies structured as master limited
partnerships (MLP) and real estate investment trusts (REIT) are also top dividend
payers since their designations require specified distributions to shareholders.
Funds may also issue regular dividend payments as stated in their investment
objectives.

Start-ups and other high-growth companies, such as those in the technology or

biotech sectors, may not offer regular dividends. Since such companies may be
in the early stages of development and may incur high costs (as well as losses)
attributed to research and development, business expansion and operational
activities, they may not have sufficient funds to issue dividends. Even profit-
making early- to mid-stage companies avoid making dividend payments if they
are aiming for higher-than-average growth and expansion, and may like to invest
the profits back in business instead of paying dividends.

Important Dividend Dates

Dividend payment procedure follows a chronological order of events and the
associated dates are important to determine the shareholders who qualify for
receiving the dividend payment.

 Announcement Date: Dividends are announced by company

management on the announcement date, and must be approved by the
shareholders before they can be paid.
 Ex-dividend Date: The date on which the dividend eligibility expires is
called the ex-dividend date or simply the ex-date. For instance, if a stock
has an ex-date of Monday, May 5, then shareholders who buy the stock on
or after that day will NOT qualify to get the dividend as they are buying it
on or after the dividend expiry date. Shareholders who own the stock one
business day prior to the ex-date - that is on Friday, May 2, or earlier - will
receive the dividend.
 Record Date: The record date is the cut-off date, established by the
company in order to determine which shareholders are eligible to receive a
dividend or distribution.
 Payment Date: The company issues the payment of the dividend on
the payment date, which is when the money gets credited to investors'
accounts.

Impact of Dividends on Share Price

Since dividends are irreversible, their payments lead to money going out of the
company’s books and accounts of the business forever. Therefore, dividend
payments impact share price – it rises on the announcement approximately by
the amount of dividend declared and declines by a similar amount at the opening
session of the ex-date.

Say a company is trading at $60 per share and it declares a $2 dividend on the
announcement date. As soon as the news becomes public, the share price will
shoot up by around $2 and hit $62. Say the stock trades at $63 one business day
prior to the ex-date. On the ex-date, it will come down by a similar $2 and will
start trading at $61 at the start of the trading session on the ex-date, because
anyone buying on the ex-date will not receive the dividend.

Why Companies Pay Dividends

Companies pay dividends for a variety of reasons. These reasons can have
different implications and interpretations for investors.
Dividends are expected by the shareholders as a reward for their trust in a
company and the company management aims to honor this sentiment by
delivering a robust track record of dividend payments. Dividend payments reflect
positively on a company and help maintain investors’ trust. Dividends are also
preferred by shareholders as they are treated as tax-free income for
shareholders in many jurisdictions, while capital gains realized through the sale
of a share whose price has increased is taxable. Traders who look for short-term
gains may also prefer getting dividend payments that offer instant tax-free gains.

A high-value dividend declaration can indicate that the company is doing well and
has generated good profits. But it can also indicate that the company does not
have suitable projects to generate better returns. Therefore, it is utilizing its cash
to pay shareholders instead of reinvesting it into growth.

If a company has a long history of past dividend payments, reducing or

eliminating the dividend amount may signal to investors that the company could
be in trouble. The announcement of a 50% decrease in dividends from General
Electric Co. (GE), one of the biggest American industrial companies, was
accompanied by a decline of more than seven percent in GE’s stock price on
November 13, 2017.

A reduction in dividend amount or a decision against making any dividend

payment may not necessarily translate into bad news about a company. It may
be possible that the company's management has better plans for investing the
money, given its financials and operations. For example, a company's
management may choose to invest in a high return project that has the potential
to magnify returns for shareholders in the long run as compared to the petty
gains they will realize through dividend payments.

A Note About Fund Dividends

Dividends paid by funds are different from dividends paid by companies. Funds
for company dividends usually come from profits that are generated from the
company's business operations. Funds work on the principle of net asset value
(NAV), which reflects the valuation of their holdings or the price of the asset(s) a
fund may be tracking. Since funds don’t have any intrinsic profits, they pay
dividends that are sourced from their NAV.

Due to the NAV-based working of funds, regular and high-frequency dividend

payments should not be misunderstood as a stellar performance by the fund. Say
a bond investing fund may pay monthly dividends as it receives money in the
form of monthly interest on its interest-bearing holdings. It is merely transferring
the interest income fully or partially to the fund investors. A stock investing fund
may also pay dividends, which may come from the dividend(s) it receives from
the stocks held in its portfolio, or by selling a certain quantity of stocks.
Essentially, the investors receiving the dividend from the fund are reducing their
holding value, which gets reflected in the reduced NAV on the ex-date.

Are Dividends Irrelevant?

Economists Merton Miller and Franco Modigliani argued that a
company's dividend policy is irrelevant and it has no effect on the price of a firm's
stock or its cost of capital. Theoretically, a shareholder may remain indifferent to
a company’s dividend policy. In the case of high dividend payments, they can
use the cash received to buy more shares. In the case of low payments, they can
sell some shares to get the necessary cash they need. In either case, the
combination of the value of an investment in the company and the cash they hold
will remain the same. Miller and Modigliani thus conclude that dividends
are irrelevant, and investors shouldn’t care about the firm's dividend policy
since they can create their own synthetically.

However, in reality, dividends allow money to be made available to shareholders,

which gives them the liberty to derive more utility out of it. They can invest in
another financial security and reap higher returns, or spend on leisure and other
utilities. Additionally, costs like taxes, brokerages, and indivisible shares make
dividends a considerable utility in the real world.

Dividends can help to offset costs from your broker and your taxes. This can
make dividend investments even more attractive. Of course, to get invested in
dividend-earning assets, one would need a stockbroker.

Buying Dividend-Paying Investments

Investors seeking dividend investments have a number of options including
stocks, mutual funds, ETFs and more. The dividend discount
model or the Gordon growth model can be helpful in choosing stock investments.
These techniques rely on anticipated future dividend streams to value shares.

To compare multiple stocks based on their dividend payment performance,

investors can use the dividend yield factor which measures the dividend in terms
of a percent of the current market price of the company’s share. The dividend
rate can also be quoted in terms of the dollar amount each share receives
(dividends per share, or DPS). In addition to dividend yield, another important
performance measure to assess the returns generated from a particular
investment is the total return factor which accounts for interest, dividends, and
increases in share price, among other capital gains.

Tax is another important consideration when investing for dividend gains.

Investors in high tax brackets are observed to prefer dividend-paying stocks if the
jurisdiction allows zero- or comparatively lower tax on dividends than the normal
rates. For example, the U.S. and Canada have a lower tax on dividend income
for shareholders, while dividend gains are tax-exempt in India.

Return on Investment (ROI)

REVIEWED BY JAMES CHEN

Updated Feb 22, 2019

What is Return on Investment (ROI)

Return on Investment (ROI) is a performance measure used to evaluate the
efficiency of an investment or compare the efficiency of a number of different
investments. ROI tries to directly measure the amount of return on a particular
investment, relative to the investment’s cost. To calculate ROI, the benefit (or
return) of an investment is divided by the cost of the investment. The result is
expressed as a percentage or a ratio.

The return on investment formula:

ROI = (Current Value of Investment - Cost of Investment) / Cost of

Investment

In the above formula, "Current Value of Investment” refers to the proceeds

obtained from the sale of the investment of interest. Because ROI is measured
as a percentage, it can be easily compared with returns from other investments,
allowing one to measure a variety of types of investments against one another.

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How To Calculate Return On Investment (ROI)
BREAKING DOWN Return on Investment (ROI)
ROI is a popular metric because of its versatility and simplicity. Essentially, ROI
can be used as a rudimentary gauge of an investment’s profitability. This could
be the ROI on a stock investment, the ROI a company expects on expanding a
factory, or the ROI generated in a real estate transaction. The calculation itself is
not too complicated, and it is relatively easy to interpret for its wide range of
applications. If an investment’s ROI is net positive, it is probably worthwhile. But
if other opportunities with higher ROIs are available, these signals can help
investors eliminate or select the best options. Likewise, investors should avoid
negative ROIs, which imply a net a loss.

For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2017 and sold
his stock shares for a total of $1,200 one year later. To calculate his return on his
investment, he would divide his profits ($1,200 - $1,000 = $200) by the
investment cost ($1,000), for a ROI of $200/$1,000, or 20 percent.

With this information, he could compare his investment in Slice Pizza with his
other projects. Suppose Joe also invested $2,000 in Big-Sale Stores Inc. in 2014
and sold his shares for a total of $2,800 in 2017. The ROI on Joe’s holdings in
Big-Sale would be $800/$2,000, or 40 percent. (See Limitations of ROI below for
potential issues arising from contrasting time frames.)

Limitations of ROI
Examples like Joe's (above) reveal some limitations of using ROI, particularly
when comparing investments. While the ROI of Joe’s second investment was
twice that of his first investment, the time between Joe’s purchase and sale was
one year for his first investment and three years for his second.

Joe could adjust the ROI of his multi-year investment accordingly. Since his total
ROI was 40 percent, to obtain his average annual ROI, he could divide 40
percent by 3 to yield 13.33 percent. With this adjustment, it appears that although
Joe’s second investment earned him more profit, his first investment was actually
the more efficient choice.

ROI can be used in conjunction with Rate of Return, which takes in account a
project’s time frame. One may also use Net Present Value (NPV), which
accounts for differences in the value of money over time, due to inflation. The
application of NPV when calculating rate of return is often called the Real Rate of
Return.

Developments in ROI
Recently, certain investors and businesses have taken an interest in the
development of a new form of the ROI metric, called "Social Return on
Investment," or SROI. SROI was initially developed in the early 2000s and takes
into account broader impacts of projects using extra-financial value (i.e. social
and environmental metrics not currently reflected in conventional financial
accounts). SROI helps understand the value proposition of
certain ESG (Environmental Social & Governance) criteria used in socially
responsible investing (SRI) practices. For instance, a company may undertake to
recycle water in its factories and replace its lighting with all LED bulbs. These
undertakings have an immediate cost which may negatively impact traditional
 ROI - however, the net benefit to society and the environment could lead to a
positive SROI

There are several other new flavors of ROI that have been developed for
particular purposes. Social media statistics ROI pinpoints the effectiveness of
social media campaigns - for example how many clicks or likes are generated for
a unit of effort. Similarly, marketing statistics ROI tries to identify the return
attributable to advertising or marketing campaigns. So-called learning ROI
relates to amount of information learned and retained as return on education or
skills training. As the world progresses and the economy changes, several other
niche forms of ROI are sure to be developed in the future.

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How Is a Company's Share Price Determined?

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BY EVAN TARVER

Updated Jun 21, 2019

Generally speaking, the stock market is driven by supply and demand, much like
any market. When a stock is sold, a buyer and seller exchange money for share
ownership. The price for which the stock is purchased becomes the new market
price. When a second share is sold, this price becomes the newest market price,
etc.

The more demand for a stock, the higher it drives the price and vice versa. The
more supply of a stock, the lower it drives the price and vice versa. So while in
theory, a stock's initial public offering (IPO) is at a price equal to the value of its
expected future dividend payments, the stock's price fluctuates based on supply
and demand. Many market forces contribute to supply and demand, and thus to
a company's stock price.

Company Value and Company Share Price

Understanding the law of supply and demand is easy; understanding demand
can be hard. The price movement of a stock indicates what investors feel a
company is worth—but how do they determine what it's worth? One factor,
certainly, is its current earnings: how much profit it makes. But investors often
look beyond the numbers. That is to say, the price of a stock doesn't only reflect
a company's current value—it also reflects the prospects for a company, the
growth that investors expect of it in the future.

Predicting a Company's Share Price

There are quantitative techniques and formulas used to predict the price of a
company's shares. Called dividend discount models (DDMs), they are based on
the concept that a stock's current price equals the sum total of all its
future dividend payments when discounted back to their present value. By
determining a company's share by the sum total of its expected future dividends,
dividend discount models use the theory of the time value of money (TVM).

The Gordon Growth Model

Several different types of dividend discount models exist. One of the most
popular, due to its straightforwardness, is the Gordon growth model. Developed
in the 1960s by U.S. economist Myron Gordon, the equation for the Gordon
growth model is represented by the following:

Present value of stock = (dividend per share) / (discount rate - growth rate)

Or, as an equation:

\begin{aligned} &P = \dfrac{D_1}{r-g}\\ &\textbf{where:}\\ &P =

\text{\small Current Stock Price}\\ &g = \text{\small Constant growth rate
in perpetuity }\\ &\text{\small expected for the dividends}\\ &r =
\text{\small Constant cost of equity capital for that }\\ &\text{\small
company (or rate of return)}\\ &D_1 = \text{\small Value of the next year's
dividends }\\ \end{aligned}P=r−gD1
where:P=Current Stock Priceg=Constant growth rate in perpetuity expected for t
he dividendsr=Constant cost of equity capital for that company (or rate of return)D
1=Value of the next year’s dividends

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1:23
Why Do Companies Care About Their Stock Price?
Example of a Share Price Valuation
For example, say Alphabet Inc. stock is trading at $100 per share. This company
requires a 5% minimum rate of return (r) and currently pays a $2 dividend per
share (D1), which is expected to increase by 3% annually (g).

The intrinsic value (p) of the stock is calculated as: $2 / (0.05 - 0.03) = $100.

According to the Gordon Growth Model, the shares are correctly valued at their
intrinsic level. If they were trading at, say $125 per share, they'd be overvalued
by 25%; if they were trading at $90, they'd be undervalued by $10 (and a buying
opportunity to value investors who seek out such stocks).

The Bottom Line

The Gordon Growth Model equation above treats a stock's present value
similarly to perpetuity, which refers to a constant stream of identical cash flows
for an infinite amount of time with no end date. Of course, in real life, companies
may not maintain the same growth rate year after year, and their stock dividends
may not increase at a constant rate.

Also, while a stock price is conceptually determined by its expected future

dividends, many companies do not distribute dividends.

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Dividend Yield
REVIEWED BY JAMES CHEN

Updated May 4, 2019

What is the Dividend Yield

The dividend yield is the ratio of a company's annual dividend compared to its
share price. The dividend yield is represented as a percentage and is calculated
as follows:

Depending on the source, the annual dividend used in the calculation could be
the total dividends paid during the most recent fiscal year, the total dividend paid
over the past four quarters or the most recent dividend multiplied by four.

As an alternative for calculating dividend yield, you can use

Investopedia's dividend yield calculator.

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1:32
Introduction To Dividend Yields
BREAKING DOWN Dividend Yield
The dividend yield is an estimate of the dividend-only return of a stock
investment. Assuming the dividend is not raised or lowered, the yield will rise
when the price of the stock falls, and it will fall when the price of the stock rises.
Because the dividend yield changes with the stock's price, it often looks
unusually high for stocks that are falling quickly.

Suppose Company-A's stock is trading at $20 and pays annual dividends of $1

per share to its shareholders. Also, suppose that Company-B's stock is trading at
$40 and also pays an annual dividend of $1 per share. This means that
Company-A's dividend yield is 5% (1 / 20 = 0.05), while Company-B's dividend
yield is only 2.5% (1 / 40 = 0.025). Assuming all other factors are equivalent, an
investor looking to use her portfolio to supplement her income would likely prefer
Company-A's stock over Company-B's, as it has double the dividend yield.

While high dividend yields are attractive, they may come at the cost of growth
potential. Every dollar a company is paying in dividends to its shareholders is a
dollar that company is not reinvesting to grow and generate capital gains.
Shareholders can earn high returns if the value of their stock increases while
they hold it.

Historical evidence suggests that a focus on dividends may amplify returns rather
than slow them down. For example, according to analysts at Hartford Funds,
since 1960, more than 82% of the total returns from the S&P 500 are from
dividends. This is true because it assumes that investors will reinvest their
dividends back into the S&P 500, which compounds their ability to earn more
dividends in the future.

Imagine an investor buys $10,000 worth of a stock with a $100 share price that is
currently paying a dividend yield of 4%. This investor owns 100 shares that all
pay a dividend of $4 per share – or $400 total. Assume that the investor uses the
$400 in dividends to purchase four more shares at $100 per share. If nothing
else changes, the investor will have 104 shares the next year that pay a total of
$416 per share, which can be reinvested again into more shares.

Sectors With High Dividend Yields

In general, mature companies that aren't growing very quickly pay the highest
dividend yields. Consumer non-cyclical stocks that market staple items
or utilities are examples of entire sectors that pay the highest average yield.

Although the dividend yield among tech stocks is lower than average, the rule
about mature companies applies to a sector like that as well. For example, in
November 2018, Qualcomm Incorporated (QCOM), an established
telecommunications equipment manufacturer, paid a dividend with a yield of
3.75%. Meanwhile, Square, Inc. (SQ), a new mobile payments processor, paid
no dividend at all.

The dividend yield may not tell you much about what kind of dividend the
company pays. For example, the average dividend yield in the market is highest
among real estate investment trusts (REITs) like Public Storage (PSA). However,
those are the yields from ordinary dividends, which are a little different than the
more common qualified dividends.

Along with REITs, master limited partnerships (MLPs) and business development
companies (BDCs) also have very high dividend yields. These companies are all
structured in such a way that the U.S. Treasury requires them to pass through
most of their income to their shareholders. The pass-through process means the
company doesn't have to pay income taxes on profits distributed as a dividend,
but the shareholder has to treat the payment as "ordinary" income on his or her
taxes. These dividends are not "qualified" for capital gains tax treatment.

The higher tax liability on ordinary dividends lowers the effective yield the
investor has earned. However, adjusted for taxes, REITs, MLPs and BDCs still
pay dividends with a higher-than-average yield.

Issues With Dividend Yields

Evaluating a stock based on its dividend yield alone is a mistake. Dividend data
can be old or based on erroneous information. Many companies have a very high
yield as their stock is falling, which usually happens before the dividend is cut.

The dividend yield can be calculated from the last full year's financial report. This
is acceptable during the first few months after the company has released its
annual report; however, the longer it has been since the annual report, the less
relevant that data will be for investors. Alternatively, investors will total the last
four quarters of dividends, which captures the trailing 12 months of dividend data.
Using a trailing dividend number is good, but it can make the yield too high or too
low if the dividend has recently been cut or raised.

Because dividends are paid quarterly, many investors will take the last quarterly
dividend, multiply it by four and use the product as the annual dividend for the
yield calculation. This approach will reflect any recent changes in the dividend,
but not all companies pay an even quarterly dividend. Some firms – especially
outside the U.S. – pay a small quarterly dividend with a large annual dividend. If
the dividend calculation is performed after the large dividend distribution, it will
give an inflated yield. Finally, some companies pay a dividend more frequently
than quarterly. A monthly dividend could result in a dividend yield calculation that
is too low. When deciding how to calculate the dividend yield, an investor should
look at the history of dividend payments to decide which method will give the
most accurate results.

Investors should also be careful when evaluating a company that looks

distressed with a higher-than-average dividend yield. Because the stock's price is
the denominator of the dividend yield equation, a strong downtrend can increase
the quotient of the calculation dramatically.

For example, General Electric Company's (GE) manufacturing and energy

divisions began underperforming from 2015 through 2018, and the stock's price
fell as earnings declined. The dividend yield jumped from 3% to more than 5% as
the price dropped. As you can see in the following chart, the decline in the share
price and eventual cut to the dividend offset any benefit from a high dividend
yield.

Dividend Yield Summary

The dividend yield is the ratio of the annual dividend compared to the current
share price and is expressed as a percentage. Because the dividend itself is
changed infrequently, the dividend yield will rise when the share price falls and
decline when the share price rises. Some stock sectors, like consumer non-
cyclical or utilities, will pay a higher-than-average dividend. Small, newer
companies that are still growing quickly pay a lower average dividend than
mature companies in the same sectors.

A companies dividends can make a stock look quite attractive and can often be a
basis in deciding what stocks you would like to invest your money in. Investing or
starting your first portfolio can often be an intimidating process. Choosing a
brokerage account can be equally intimidating. Since you can't begin to invest
without a broker account, Investopedia has created a list of the best online stock
brokers to help get you started.

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