Whether you’re just starting on the great path of trading or you’re already a pro, you probably know what an important factor dividend yield is. It helps determine the true value of a dividend stock. And you can notice its importance especially when traders just like you seek to pull dividend revenue from the investments they made. Here is all you need to know about dividend yield and more.
What Is Dividend Yield?
To put it simple, the dividend yield is an easy way to determine how attractive a certain divided-paying stock really is. The math is quite simple too, because the more a dividend can yield in terms of percentages and financial return, the more attractive it is. It can tell you exactly what to expect from a package of stocks you’re thinking of investing in.
By definition, the dividend yield represents the relationship between the dividends annual payout of a stock and its present day price. It’s a forever changing percentage because stock prices move very much, even in the course of a single day.
As far as issuing companies go, most of them pay quarterly dividends that are predictable to a certain extent to shareholders. That’s because companies pay approximately the same quarterly dividend all year long, around the same date. There are certain companies that do increase their dividends every year and have done so from a historical point of view. This placed them either in the Dividend Aristocrats list or the Dividend Kings one. Please read below for more details on these indexes.
Companies whose stock price is increasing need to up their dividend payout as well because they need to maintain their dividend yield. That’s thereason why all these companies pay increasingly better dividends with each passing year.
The Dividend Yield Calculator and How to Calculate Yields Yourself
Most of the times, traders work with a brokerage firm or even with a personal broker. This allotted person calculates the trader’s dividends and yields and presents him with some reports. However, that doesn’t mean you cannot do it yourself, should you wish to spare the expenses on a broker’s services.
In order to calculate your yields, you need to use the dividend yield formula. You actually have to divide the annual dividend by the current stock price, as follows:
Let’s take a look at an example:
Take stock XYZ. It had a share price of $50 and its dividend per annum was $1. This means that its yield would be 2%.
$1.00 / $50 = .02 (When you put 0.02 in percentage format, you get 2%)
If the selected share price would rise to, let’s say, $60, but its dividend payout would not for one reason or another, then the yield would drop to 1.66%. What you need to remember here is that, according to the formula, the yield is calculated using yearly yields, not quarterly or monthly ones. It doesn’t matter if your own portfolio has companies that offer dividend payouts on a monthly basis. When calculating, you need to add those up and see what your annual return is.
Should you not wish to perform these calculations on your own, here is a good online calculator from Investopediathat can help you.
What Is the S&P 500 Dividend Yield?
As you probably already know, the S&P 500 or the Standard & Poor’s 500 is an index belonging to the American stock market. It’s based on market capitalizations of the largest 500 companies that have their stocks listed either on the NASDAQ or the NYSE. All these companies come together under the S&P umbrella and have a combined market cap of $18.5 trillion (at the end of August 2015). The index’ components and its weightings are determined by S&P Dow Jones Indices.
All these characteristics of the S&P 500 index make it natural for you to want to invest in it first. But what exactly is its yield? The best part of the index’ companies have a yield of 1% or 2%. Today’s market has only just under 40 companies that offer a yield bigger than 4%. Breaking down the index according to its companies yields, it would look like this:
- Less than 1% yield = 13.2% of the index = 56 companies
- 1-2% yield = 34.3% of the index = 145 companies
- 2-3% yield = 30% of the index = 127 companies
- 3-4% yield = 14.4% of the index = 61 companies
- More than 4% yield = 8.0% of the index = 34 companies
Here are the 5 companies with the highest and lowest yields in the S&P 500 index so far in 2016.
The top 5 companies, with the biggest yields are:
- HCP, Inc. – 8.12% yield and a dividend of 2.30
- AT&T – 5.24% yield and a dividend of 1.92
- Chevron – 5.16% yield and a dividend of 4.28
- AbbVie, Inc. – 4.26% yield and a dividend of 2.28
- Emerson Electric – 4.05% yield and a dividend of 1.90
The top 5 companies, with the lowest yields are:
- Brown-Forman – 0.00% yield and a dividend of 0.00
- Cintas – 0.00% yield and a dividend of 1.05
- Franklin Resources – 0.00% yield and a dividend of 0.72
- Bard, C.r. – 0.51% yield and a dividend of 0.96
- Hormel Foods – 0.70% yield and a dividend of 0.58
What Are the Dividend Aristocrats and Kings?
The S&P 500 Dividend Aristocrats list is actually an index in itself, containing all the companies that have managed to increase their dividend payouts for 25 or more consecutive years. As expected, this list is home to some of the biggest and oldest companies in the world. They span over ten different business sectors.
As far as its history goes, in 2009, it was cut down to 42 companies from 52, because most of them reduced their payouts. In 2012, however, 9 more companies were added. In 2013, the list grew again only to see itself reduced once more in 2014, when the Family Dollar Stores company was taken out of the list. It was purchase by Dollar Tree. It’s important for you, as an investor, to track down all these changes and keep an eye on them. The fewer companies there are on the Aristocrats list, the less safe options you have for investing.
Some example of companies included in the Dividend Aristocrats index are:
- 3M Company (MMM)
- AT&T (T)
- Archer-Daniels-Midland Co (ADM)
- Coca-Cola Co (KO)
- Colgate-Palmolive (CL)
- Exxon Mobil Corp (XOM)
- McDonald’s Corp (MCD)
- Procter & Gamble (PG)
- Walmart (WMT)
- Walgreen Company (WBA)
- Target Corporation (TGT)
The Dividend Kings list works in the same way as the Aristocrats one. The difference is that it lists all the companies that have managed to pay increasing dividend yields for 50 or more consecutive years to their shareholders. Only 17 companies have made the cut. As far as 2016 goes, the list includes some of the following companies:
- Johnson & Johnson
- Colgate-Palmolive Co.
- Farmers & Merchants Bancorp
- Lancaster Colony Corp.
- 3M Company
- Emerson Electric
- American States Waterre 3
Discovering the High Yield Dividend Stocks
As a result, after finding out all this information on dividend yields, which exactly are the highest yielding dividend stocks you should invest in in 2016? Here are a few possible choices.
- Archer-Daniels-Midland – this is the biggest company in the world as far as farm products go. They have a capital market of over $20 billion, are a dividend aristocrat and almost a king. They have been paying increasing dividends for the past 40 years.
- Walmart – this company has a 3.4% yield and a 49 cent dividend, which is quite alright. Their latest increase happened at the end of 2015.
- IBM – An interesting fact about IBM is that it represents 8.9% of Warren Buffet’s portfolio. This leads us to believe that any company holding such a huge percentage of the world’s most successful investor’s portfolio must be worth investing in.
- General Motors – They have a stunning 4.1% dividend yield, which makes them extremely attractive for investors. The current distribution is of 36 cents. It actually grew from 30 cents, the amount they offered in 2014.
- AT&T – They are the biggest dividend payer on every list. The percentage comes up to a whopping 5.8%. The payout is 47 cents each quarter, they have a low beta and large mutual funds. Warren Buffet currently holds some 59.3 million shares with IBM.
You can also use the Vanguard High Dividend Yield ETF. It tracks the performance of the FTSE® High Dividend Yield Index. This measures the investment return on common stocks issued by companies with high dividend yields. Take a look at giant corporations as well to see if they are interesting enough for you. Microsoft and Apple are two very good examples here.
There are what they call the Blue Chip companies as well, meaning they have a very good return ration as far as average yields go. Some of them are Deere & Company (DE), Verizon Wireless (VZ), and Caterpillar (CAT). As you might have noticed, the Aristocrats, Kings, and Blue Chip lists have many companies in common.
Dividend yields are easy enough to understand and work with, provided you had the proper training beforehand. For this, you can either ask a broker to explain to you how it’s calculated and what it means, or you can educate yourself. Try reading as much online material as you can and remember that the market is always shifting. That means the learning process should never end.