Dividend Yield Formula and Examples

In 2022, tech stocks were seeing unprecedented volatility. Yet, investors flocked to high dividend-paying companies like ExxonMobil and AT&T. The reason was simple: dividend yield. When the stock market feels shaky, those steady dividends can be a lifeline, providing income even when capital gains might not be available.

But let’s get right into the numbers. The formula for dividend yield is incredibly straightforward:

This formula offers investors an easy way to evaluate the return they can expect purely from dividends, independent of stock price appreciation.

Example 1: Coca-Cola (KO)
Let’s take Coca-Cola as an example. Suppose the stock is priced at $60 per share, and the company announces an annual dividend of $1.60 per share. Using the formula, the dividend yield would be:

In this case, Coca-Cola provides an investor a yield of 2.67%, meaning for every $100 invested, you’re earning $2.67 in dividends annually. This yield may seem small, but in the world of dividend stocks, stability and consistency are key.

Why Does Dividend Yield Matter?
Now, if you’re thinking, "Why should I care about dividend yield when capital appreciation seems more lucrative?" you’re not alone. The thing is, during times of market downturns or when interest rates are low, dividend stocks offer an attractive income stream. For retirees, for example, dividend income is often a critical component of their investment strategy.

In early 2023, AT&T’s stock price fell significantly, yet many income investors held on because the dividend yield was hovering around 6%. For them, that meant they were earning a higher income relative to the price they paid for the stock.

High Dividend Yield: Is It Always Good?
A high dividend yield often grabs attention, but it’s not always a positive signal. Imagine a company’s stock price falling sharply. If its dividend payments remain constant, the dividend yield will rise because the formula depends on stock price. This could be a warning sign that the company is in trouble.

Let’s say a company’s stock falls from $100 to $50, and its annual dividend remains $5. The yield shoots from 5% to 10%, which may seem like a great opportunity. But in reality, the falling stock price might signal financial instability, and the company could cut its dividend soon.

Example 2: AT&T (T)
AT&T is a classic example of this phenomenon. In 2022, its stock price fell significantly while maintaining a high dividend yield. Investors, attracted by the high yield, bought into the stock. However, soon after, AT&T announced a dividend cut, and the yield adjusted accordingly.

This brings us to another crucial point: Dividend sustainability. It’s not just about the yield; it’s about whether the company can continue paying that dividend.

Calculating Future Yield: A Predictive Tool?
Investors often use dividend yield as a predictive tool. For instance, consider an investor who is analyzing Apple’s stock. With a current yield of 0.55%, Apple doesn’t appear to be a high dividend payer. But what if the investor believes that Apple will increase its dividends in the coming years? Based on this assumption, the investor might anticipate a higher future dividend yield, making Apple an appealing long-term hold.

Case Study: ExxonMobil in 2023
ExxonMobil, in early 2023, was a darling of dividend investors. With a yield of 5.7%, it provided a strong income stream while also offering potential for capital appreciation, as oil prices were surging. The yield calculation was simple:

In this scenario, ExxonMobil rewarded investors with both solid dividends and strong stock performance.

But what happens when a company’s fundamentals change drastically? This is where payout ratios come into play.

The Role of Payout Ratios in Assessing Yield
The payout ratio is the percentage of a company’s earnings that are paid out as dividends. A high dividend yield is only attractive if the company can maintain or grow its dividend. By calculating the payout ratio, investors can assess how likely it is that a company will keep paying (or even increase) its dividends.

If a company’s payout ratio exceeds 100%, it’s paying out more in dividends than it earns, which is unsustainable in the long run. Ideally, you want to see a payout ratio below 80%—this indicates a good balance between rewarding shareholders and reinvesting in the company.

Example 3: Microsoft (MSFT)
Let’s take Microsoft, a company known for its balance between growth and income. In 2023, Microsoft had a payout ratio of around 30%, meaning it retains the majority of its earnings for reinvestment. The dividend yield was modest at 0.89%, but it was considered safe due to Microsoft’s strong financials and low payout ratio. Here’s the math:

Even though the yield was lower compared to high-yielding stocks, investors saw this as a stable long-term play.

Comparing Dividend Yields Across Industries
Dividend yields can vary significantly across industries. Tech companies like Microsoft and Apple typically offer lower yields but focus on growth. Meanwhile, utility companies and telecoms often provide higher yields, offering a more consistent income stream.

Let’s compare two sectors: technology and utilities:

As seen in the table, utility companies tend to offer higher yields, which is appealing for income investors. However, these industries often experience slower growth compared to tech stocks.

The Trade-Off: High Yield vs. Growth Potential
There’s a crucial trade-off when it comes to dividend investing. High dividend yields usually mean slower growth, while companies offering lower yields often have higher potential for capital appreciation. Investors need to decide whether they prioritize immediate income or long-term growth.

Conclusion: Mastering the Dividend Yield Metric
Dividend yield is a simple yet powerful tool that can guide your investment decisions. Whether you’re looking for steady income or balancing between income and growth, understanding dividend yield—and how it interacts with other factors like payout ratio and industry trends—can give you an edge.

Investors who focus solely on high yield may find themselves trapped in risky investments, while those who consider the broader picture, including payout ratios and industry trends, are more likely to succeed in the long run.

Ultimately, mastering dividend yield allows you to build a well-rounded portfolio that fits your financial goals. Whether it's the slow and steady returns of Coca-Cola or the growth potential of tech stocks, the dividend yield formula offers a critical lens for evaluating your investments.