Dividend stocks are stocks that yield dividend payouts to shareholders. Most companies pay yields on dividend stocks quarterly, although some may pay dividends on a monthly, semi-annual, or annual basis.
If you are interested in investing in dividend stocks, there are some important metrics that you need to consider:
This refers to the number of dividends that companies pay to shareholders. These dividends are usually computed annually to account for other important ratios.
You can learn how to calculate dividend yield by dividing the annual dividend payout amount by the current price of the shares. The ratio represents the income that you will potentially receive from your shares, based on the current price. Dividend yields can be used for gross comparisons with interest rates.
If you have a dividend yield of 4%, for example, you essentially have a higher interest rate than that which you would typically earn from most banks.
Dividend Yield Formula
Investors in dividend growth stocks can generally expect their incomes to increase correspondingly as the dividend increases. It is possible to achieve compound growth with dividend stocks if you reinvest them through a full DRIP or a synthetic DRIP.
Dividend Payout Ratio
These represent the amount that companies pay to shareholders from the stock earnings. The amount that remains is then put to use by the company for continued growth. Dividend yield stocks payout to shareholders income that might otherwise be invested. Consequently, the higher the dividend payout ratio the company provides, the fewer funds it will have for research and other means to generate revenue.
Prospective investors should pay close attention to the dividend payout ratios of companies they are thinking of investing in. Not all companies provide the same dividend payout ratios. Depending on the company and the industry, companies may decide to retain higher or lower percentages of their earnings in order to remain competitive. The amount that companies retain after paying dividends to investors is known as “retained earnings.”