The yield measures how large the dividend is in relation to the share price. Higher direct returns mean that you receive a higher dividend per invested dollar.
So, what is yield?
Yield is a measure of how high the dividend in a company is in relation to the share price. It thus shows what percentage of your investment you get back in the form of dividends each year.
If you have ever looked for a bank account with as high an interest rate as possible, you have probably looked for the highest yield. It is more common to look at the percentage interest (yield) the account gives than to calculate how many dollars and cents you get from the savings account (dividend).
How do you calculate the yield on a share?
You can easily calculate by dividing the share’s dividend by the share price.
How does yield work?
Dividends and yield are two sides of the same coin. Two people who buy the same share at different share prices have different yields on their investments, even though the dividend in dollar is exactly the same.
This is because the yield is affected by both the share price and the dividend.
If you buy shares in a company on several different occasions, you will therefore receive a different yield on each purchase, provided that the price moves.
What is the yield affected by?
What yield your investment receives depends on what dividend the company gives and at what price you buy the share.
Sometimes a share can fall a lot, which makes the yield look very high. If a share has fallen sharply, it may be an idea to take a closer look at why the price has fallen, so that you do not miss any important information that affects the company’s future.
That a company informs the market that it will reduce the dividend can be such an example.
How is yield affected by the share price?
For example, a dividend of $5 in a share that costs $100 gives a direct return of 5%. But what happens if the stock price rises or falls?
The dividend is usually determined once a year after the company has calculated the profit for the year and thought about what to do with the profit – distribute it or reinvest it in the company. The share price, on the other hand, changes all the time on the stock exchange.
- A rising share price causes the direct return to fall
- A falling share price causes the direct return to rise
Is low or high yields best?
There is no rule of thumb for what is a good or bad yield. On the other hand, mature companies usually distribute a larger share of the profits than smaller companies that often need the money to continue to grow.
Shareholders in a company that does not pay dividends will expect the company to use the money wisely to continue to grow and deliver rising profits.
If the company does not live up to the stock market’s expectations or has difficulty finding good investment opportunities, it is better to distribute all or part of the profit in the form of a dividend to the shareholders, who can then decide for themselves how the profit is to be invested.
The companies that distribute a large share of the profits usually have a high yield.
One could simply say that a person who wants shares with a high dividend should look at companies that have a higher yield than the average.
A high yield can sometimes be a form of airbag when the stock market falls. When the share price falls, the yield rises because the dividend is the same.
If the market does not believe that the falling share price is due to the company’s future prospects, interest in buying the share usually rises as the yield increases.
How is Yield used?
For those who are looking for shares with dividends, a high direct return is attractive, as you get more dividends per every dollar you have invested. Not all companies have a dividend and in that case the direct return will be = 0.
Yields are two-sided and the higher does not necessarily have to be the best investment. A dividend is a direct expense for a company, which means that it is money that leaves the company without debt.
If too much money leaves the company today and little is invested or amortized for the future, the company may not succeed in creating a profit and thus not a dividend.
Ensure that the company has a stable economy that can justify the dividend given.
Low direct returns may indicate that the company does not have the ambition to distribute a large dividend to shareholders but instead chooses to keep money to invest in the company.
A complement to your hunt for dividends is to look at the company’s dividend policy to see how the company reacts to dividends.
This is most easily found by searching for “Company name” + “Dividend policy”.
It can also mean that it is a smaller company in the growth phase that is currently investing all its money in growth so that you as a shareholder get an increased price for your shares.
The key figure dividend growth is a good complement to your analysis. Dividend growth measures how much the company has chosen to increase dividends historically.
If you find a company with a low yield today, it can still be worth buying if it is expected to be a good dividend growth in the future.
What is a dividend?
As a shareholder, you are a partner in a limited company and you are entitled to current and future profits. A dividend is made from the company’s equity.
The value of the company decreases by the same amount as you pay out. Do all shares pay dividends? No, only those who decide they want to do it.
Some companies do not want to distribute money to their shareholders but believe that they themselves can do more for the dividend.
Why and when should I look at a stock’s yield?
Some investors want high-yield stocks to get a current income in the form of dividends. Others buy shares in companies that do not distribute money but instead keep them to continue to grow.
Companies that grow rapidly and are in need of capital usually keep the profit to reinvest in the business, while more mature companies that do not grow as fast usually distribute part of the profit.
One question you can ask yourself is what do you value most – is it the opportunity for exchange rate growth or current income in the form of dividends?
Many would probably answer that it is a combination of these.
Bengt and Jonas both own shares but have slightly different views on their investments. Jonas who does not feel comfortable with too high a risk usually invests in mature companies.
He often looks for a high yield because he wants to use the dividend every year to come up with something fun with the family.
He values security rather than trying to dot the stock rockets.
Bengt, on the other hand, likes the excitement of trying to find the next rocket on the stock market. He does not need the money today but intends to use it far in the future.
Bengt is therefore trying to find companies that are good at using the profits wisely to continue to grow and thinks it is okay that the company is not distributing any money right now.
Invest in stocks with yield
If you are a shareholder who thinks long-term when investing in stocks, then you can invest in stocks with good yield. A yield is one of two ways you can make money on your shares. The second way is by raising the share price.
A dividend is usually paid once or twice a year for Swedish shares and the yield is a measure of calculating how large the dividend is in relation to the share price.
Easier than that, it can be said that it shows how much interest the share gives.
Shares with a good yield in relation to the share price are good shares to invest in if you look at your savings in the long term and want to take part in dividends to be able to use this money to increase your holding.
While it is important to keep the price risk in mind, ie that the price can fall sharply downwards, it is a way to ensure that you invest in shares that will give you a good dividend.
Where there is a yield, it is also possible to use interest on the interest rate effect.