What is Dividend Yield? What do you want to know

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What is dividend yield? This is a great question for budding investors.

Dividends are one of only two reasons to own stocks and the only reason you can rely on stocks to any degree. Dividends are the payments that publicly traded companies make to their investors, and dividend yield measures how much payout you can expect for your investment.

What is Dividend Yield?

So going deeper, what is a dividend yield? Dividend yield is more important than dividend amount and should be the first and last metric when choosing a dividend-paying stock. The dividend amount could be $1,000 per quarter per share, and the yield is only 1% – that's not much and is lower than the average S&P 500 stock. that earn 1% while paying $4,000 a year have an astronomical and prohibitive stock price.

The dividend yield is the rate of return you can expect from a given investment, which is very similar to the yield on a savings account. The difference is that dividend payments and their yields are usually paid at the whim of a board of directors. With that in mind, a stock that costs $10 and pays a sustainable return of 5% is far more attractive than any dividend-paying stock that only pays 1%, regardless of the dollar payout amount.

Understanding Dividend Yield

Dividend yield is a stock's income relative to its price. Expressed as a percentage, it tells investors how much income they can expect from a stock in the future.

How to Calculate Dividend Yield

The dividend yield formula is easy to calculate. Here's how to calculate the dividend yield: Divide the annual dividend payment by the stock price and express it as a percentage. For example, a stock that trades at $100 and earns $1 has a yield of 1%.

Benefits of Dividend Yield

There are many reasons to own dividend stocks, and here is a short list of the main reasons. You can find the best dividend stocks using a dividend stock tool.

Income Generation: The primary reason for owning dividend stocks is to generate income. Dividend stocks pay you to hold them, and you can use the dividends to reinvest, pay bills, or for other purposes. Improve total returns: Dividend yield can improve a portfolio's total return or the combined gain from capital appreciation and dividend payouts. Compound investments: Dividend yield is excellent for compound investments. The amount of the distribution will increase each quarter if you use the dividend payments to buy more shares. If the distribution also increases, investors can achieve a double-digit compound annual growth rate (CAGR). Dividend capture strategy: You don't need to own dividend-paying stocks for more than a day to get the payout. The dividend capture strategy is based on the ex-dividend date relative to the record day and allows for quick income with less risk. Disadvantages of Dividend Yield

Dividends, as good as they are, also have some negative aspects, including the following:

Double taxation: Money used to pay dividends is taxed twice because the company pays taxes on its profits, and you then pay taxes on your investment gains. This has led to strong criticism of the tax code, but that's no reason to avoid dividend-paying stocks. Income vs. growth: Dividend-paying stocks, especially blue-chip dividend growth stocks like Dividend Aristocrats and Dividend Kings, are not in a growth phase. You may not see appreciable capital gains when you hold them because the growth has already occurred or the prices are in the market. Diversification vs. income: You can achieve diversification with dividend-paying stocks, but it's more difficult for non-dividend-specific portfolios. Example of dividend yield

A div yield is the amount of distribution an investor can expect from the initial investment. Dividend yield changes over time, a...