Stocks are the smallest unit of ownership for a company. Each share of stock entitles the stockholder to certain rights, including the right to receive a dividend if issued. Dividends are issued by the company out of earnings and are usually paid out every quarter. Not all companies issue dividends, but those that do measure and compare dividend payments with the dividend yield ratio.
Dividend Yield Ratio
There are thousands of companies on the market that pay out a dividend to shareholders. Some companies are large, some are small, some have increasing net income, and others have decreasing net income. The challenge in finding the company with the best dividend yield is figuring out a way to compare the dividend payment to the current price of one share of stock. Enter dividend yield.
The dividend yield is calculated using two different variables. They are the annual dividend payment per share and the price per share. In general, companies issue a dividend once a quarter. The annual dividend payment is the sum of all four dividend payments for the quarter. The price per share is the current market price of one share of stock. As an example, assume you own a stock that is currently trading at $10 per share. The dividend payment per share is 25 cents per quarter, which equals $1 for the year. The dividend yield is calculated by dividing the annual dividends per share, $1, by the price per share, $10. The calculation is $1 divided by $10, or 10 percent.
The best dividend companies are usually concentrated in those industries with low growth in terms of earnings. These are mature industries such as utilities or banking. Banks are well known for issuing dividends to shareholders. High-technology and Internet stocks usually don't pay out a high dividend. In general, companies with a high growth rate in terms of share price also have a low dividend yield.
Locating the Best Dividend Yield Stocks
In general, a higher dividend yield is indicative of a company that pays a high dividend. However, the best dividend yield stocks are not always the ones with the highest yield. Some companies pay out a high dividend with debt in order to attract investors. A dividend yield over 10 percent, while high, may also be indicative of a highly risky investment.