Dividend Yield Calculation: A Simple Guide

To calculate the yield on a dividend stock you need some basic information. You need the stock price and the annual dividend. The equation that you should use is: dividend yield = annual dividend / stock price.  Many popular financial websites list the dividend payment that is made quarterly, but because you are interested in the annual dividend, this number must often be multiplied by four to get the annual dividend yield. Furthermore, the dividend yield is calculated in terms of the price of the stock, so if you are an owner of the stock, you calculate the yield against your cost basis. The stock price fluctuates regularly, so dividend yield is a moving number until the purchase price is set.

Dividend yield is an important figure because it serves as one of the elements of return. While the price of a blue chip stock may remain stable and appreciate slowly, the dividend yield provides an ongoing return stream. You can compare this number to the prevailing interest offered on a similar quality bond. The equity has far greater upside potential, so if the yield is similar, it may be a reason to prefer the equity. Unless you believe the company is in jeopardy (bondholders have greater protection in bankruptcy), you may prefer equity investments with strong dividends.