How to Solve for Equity Dividend Rate


The dividend rate or yield of a stock can be an important determinant in the worth of an investment. To properly assess the dividend, you need to not only compute using basic math to determine the dividend yield, you also need to assess the stock relative to other investment options. This is an ongoing process even after you own the stock as companies continue to change--sometimes for the better and sometimes for the worse.

Compute the equity dividend rate. To figure the equity dividend rate, divide the annual payment of dividends per share by the market price of a share. Use annual figures as there are some stocks that pay dividends on a different schedule than others. While most U.S. stocks pay dividends quarterly, many foreign stocks do not.

Asssess the stability of the dividend. The usefulness of the equity's dividend depends largely on the reliability of the dividend in the future. This can be predicted to some degree by researching the company's cash flows and the percentage of available funds that are used to pay dividends. Companies that have funds well in excess of the amount paid in dividends are much more likely to continue to pay dividends.

Compare the dividend rate to comparable investments. For ownership in the equity to be a good investment, it must provide returns that are at least comparable to those of comparable companies. Though it is not a perfect measure, comparing the recent and historic returns and financial statements of your company relative to its competitors helps determine whether the returns (including the dividend) is as good as it should be.

Consider the tax advantages of dividends. Unlike salary and interest income, dividends are taxed at the capital gains rate of 15 percent. This is much lower than the rates charged high income individuals for other sources of income, so dividends can be a useful source of money.

Compare dividend to bond yields. Equity dividends come with more risk than interest payments from bonds. Depending on the overall risk adjusted return expected for the stock, the returns from a bond may be preferable. Examine thoroughly the company's filings with the SEC to help in researching the company's financial position and its assessment of the business environment. These can be important factors in deciding whether the equity with its dividend is a desirable investment.

Tips & Warnings

  • Remember, the effective yield of any stock you buy is based on your initial investment, not the current market price of the stock. So, the effective rate on stocks that were purchased many years ago may be higher than it at first appears.

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