When you invest in a company's stock, you expect to receive dividends on your investment. Your dividend yield refers to the ratio of dividends to the stock's trading price.
Essentially, the dividend yield describes the benefit to the investor. The higher the percentage of dividend yield, the more beneficial the stock becomes.
Calculating the Dividend Yield
Comparing dividend yields provides the easiest way to understand how it works. Imaging you've invested in Company 1 and Company 2. Company 1 pays annual dividends of $2 for each share and trades at $20 while Company 2 pays dividends of $1 and trades at $30 per share.
To determine the dividend yield, divide the trading price by the dividend. Company 1's dividend yield is 10 percent (2/20) and Company 2's is 3 percent (1/30). You would view Company 1 as the more profitable investment.
Choosing Stocks by Dividend Yield
Many investors keep a close eye on the dividend yields to make their stock decisions. Several sources allow investors to view the highest dividend yields. For example, NASDAQ lists Tribune Media Company (TRCO) as the highest dividend yield at 48.05 percent as of March 2015.
Some companies never pay dividends to their shareholders. If a corporation fails to turn a profit, for example, it can't pay dividends. Some companies also choose to absorb profits back into the company for expansions, research and development, or other expenses. High dividend stocks pay more than the average rate, which amounts to approximately 2.5 percent, according to Trendshare.
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