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What is the difference between Dividend and Yield? Which is more important, dividend or dividend yield?
Video: What is Dividend Yield?
Dividend and Yield
Dividend and Yield are two complementary words, commonly used in finance. What is the difference between these two terms? Which is more critical, dividend or yield? Should investors focus on dividend or just yield or both? These are common questions raised by new investors. This article, provides the answers to above queries in detail.
Dividend, defines the amount paid by the company to the investors who own the stocks. It is part of the company's income that is distributed to individual investors. Dividend paying companies with good fundamentals, are very attractive investment. They provide good source of quarterly or annual income. The investors like to own such companies and thus, paying dividend is a good way to attract and keep committed, long term investors. For example, if AGNC, REIT based company, listed in NASDAQ, pays an annual dividend of $5. It implies, that if an investor own 500 stocks for the whole year, it can provide an extra income of $2500. The capital gain or loss is not considered here.
Yield or specifically, dividend yield, is a financial percentage, that divides the annual dividend per share by the current stock price per share. It helps to compare two dividend yielding stocks and find which is offering best dividend return in contrast to amount invested. If two shares have same dividend amount paid to investors, then dividend yield helps to find which offers better return, keeping the investment amount constant.
For instance, if AGNC offers an annual dividend of $5 and the stock price is $33.60. Another stock, NLY offers an annual dividend yield of $2.2 and the stock price is 16.91. Which offers better return for the same amount invested? AGNC has a dividend yield of (5/33.6)*100 = 14.9%. NLY has a dividend yield of (2.2/16.9)*100=13%. Thus, AGNC offers a better dividend yield and it will thus provide more dividend money when the amount invested in both stocks is equal.
Thus, dividend yield tends to be more critical than the dividend amount. It can help us to compare even 100 stocks or any number of stocks with different price range and tell which offers the best dividend amount as compared to the amount invested. Thus, it is best to look in the dividend yield when choosing the stock. Other factors, like fundamentals, technical chart, etc. need to be considered also when deciding the best stock. Investment knowledge and guidance is advised. All information is for suggestion only.