Learning Mathanese: How to Calculate the Dividend Yield

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Math. So intimidating is this four-letter word that people do everything they can to avoid it, even when they know that doing so puts their financial well-being in peril.

Wait! Don't click away. You are mere paragraphs away from mastering one of life's most important equations. This article kicks off a short series in which we'll review the major computations behind the numbers you see at AOL DailyFinance. In other words, you are about to learn Mathanese -- aka the numbers behind investing's big equations.

Don't worry, there's nothing too complicated here, despite how difficult and intimidating many professional money managers and Wall Street talking heads make it seem. We're talking about things most 10-year-olds have learned upon graduating fifth grade. Today, let's start with the dividend yield.

Dividends: Like Interest, Only Different

If you've ever looked at a quotes page for a stock, chances are you've seen a space for "yield." Expressed as a percentage, the yield explains what investors can expect to get from holding a stock for a year.

Say you own shares of Altria (MO), which has a long history of paying dividends to shareholders. The stock yields 6.1% as of this writing. Put money into the stock right now, and -- barring changes to the payout -- you can expect to earn back 6.1% on our money in the year ahead. Here's the math:

[Dividends to be paid over the next 12 months / current stock price] * 100

In this case, the numbers are: [\$1.64 / \$26.83] *100 = 6.11

Now here's where the math gets a tad tricky. Just because Altria yields 6.1% today doesn't mean it will yield 6.1% tomorrow. Stock prices fluctuate, and with them, the yield does, too. The higher the price, the lower the yield -- and vice versa. But now you know how to calculate the yield every single day.

In this sense, knowing the yield isn't like knowing the rate on your credit card. Interest rates are typically fixed while stock prices are anything but.

So why do you need to know how to calculate the yield? Higher-yielding stocks tend to outperform lower yielding ones. Knowing the math makes it more likely you'll find high-yielding gems such as National Grid (NGG) and Southern Co. (SO). Both stocks have proven to be winners for my Motley Fool colleague Dan Dzombak, in a high-yield portfolio that is up more than 13 percentage points on the overall market as of this writing.

Motley Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings or connect with him on Google+ or Twitter, where he goes by @milehighfool. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended buying shares of National Grid and Southern.

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jhbonz

Shouldn't inflation figure in? The dollar has lost 9% in the past year so that wpies out that gain (except in the eyes of the tax man) doesn't it.

September 13 2011 at 7:42 AM Report abuse rate up rate down Reply
ARTHUR TRAUT

,K

September 12 2011 at 11:33 PM Report abuse rate up rate down Reply
andjj

If you are holding a stock the current yield does not matter. The Yield that counts the most is the cost that you have invested in the stock. If the stock price goes up and the dividend doesn't your yield is still what it was the day you purchased the stock.

September 12 2011 at 8:30 PM Report abuse +1 rate up rate down Reply
dabrownman

Much more important than dividend yield is the company's ability to pay the dividend in the future and if it is growing its dividend yield. and some appreciation potential. Even though NGG is paying over 7.5%' I prefer BP (great upside potential too), SO and EXC at 4.5% or so instead but it is in my top 5 and I do own it.

September 12 2011 at 3:31 PM Report abuse rate up rate down Reply
lsloanpdx

Since Feb. AOL portfolios has been partially down. Make on AOL a portfolio of stocks with dividend yield as a column and put the following tickers in: ACG, BTI, CHI, CSQ, DEO, DHG, DVY, EFG, EFV, EWM, EWU, IDV, IXP, JGV, LYG, MRF, NGG, PCM, PPR, RQI, SDY, VNQ, XLU, ACAS, SFI, CSE.

ALL EXCEPT 3 HAVE A DASH FOR YIELD. THEY ARE ALL EITHER CLOSED END FUNDS, ETFS (BOTH TRADE AS STOCKS), OR FOREIGN TRADING ON THE BIG BOARD.

I have sent numerous email to over 10 AOL addresses I have and you see the response.

i have spoke with Krista Rouse a senior on the financial site and Jay Kirsh VP. All to no avail, Kirsch told me it would be fixed in June.

From the portfolio you built, click the ticker for each position. you will notice on the stock page that some of them show a yield, but is not transferred to the port folio page, All of the others pay a yield, but it is neither on the portfolio or the stock page.

Kirsh told me all the great things coming, but I told him he ought to start with the things that became missing in Feb.

Since the FOOL is working with Aol and I am a paying member of the Fool and the INCOME LETTER. Would you please get to TIM ARMSTRONG CEO and see if he would help.

I AM A PAYING CUSTOMER (THEY DON'T TREAT US LIKE MEMBERS) OF AOL AND WOULD LIKE MY MONEYS WORTH, (\$180 YR)

September 12 2011 at 2:24 PM Report abuse rate up rate down Reply
cmerr6240

Who cares about the yield. All I care about is the Divedend rate. A while back you could get that figure on the Aol
portfolio, Now they only show the yield. I want to know how much will be in my pocket not some figure that changes from day to day.

September 12 2011 at 11:15 AM Report abuse +1 rate up rate down Reply
h1035

Higher yielding stocks do not tend to outperform. Higher the yield greater the risk and less growth. Many times high yielding stocks have market values in decline. Growth and value stocks both have low yields.

September 10 2011 at 9:18 AM Report abuse -1 rate up rate down Reply