Dividend Yield

The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It's often expressed as a percentage.

A dividend is a company make a payment to its shareholders from their earnings. It's usually payout as a per-share amount. When you compare companies' dividends, usually we call the "dividend yield" or "yield." That's the dividend amount divided by the stock price. Example: If a stock pays an annual dividend of $4.5 and is trading at $90 a share, it would have a yield of 5%.

Not all stocks pay dividends, nor should they. If a company is growing quickly and can best benefit shareholders by reinvesting its earnings in the business, that's what it should do. Google doesn't pay a dividend, but the company's shareholders aren't complaining. A stock with no dividend or yield isn't necessarily a loser.

When you're searching for stocks with high dividend yields, you should always look at the company's payout ratio. It tells you what percentage of earnings company is paying out to shareholders in the form of dividends. If the number is above 65% consider it a red flag -- it might mean the company is failing to reinvest enough of its profits in the business. A high payout ratio often means the company's earnings are faltering or that it is trying to entice investors who find little else to get excited about.

But don't invest stocks with the highest yield only, it might get you in trouble. When a stock at $100 a share and it has $4 dividend, so it has 4% yield. 4% is well above the market average, which is usually about 1.5 to 2%. But that doesn't mean all is well with the stock. Consider what happens if the company misses a quarterly earnings; and the price falls to $80. That's a 20% drop in value, but it actually raises the yield to 5%. Would you like to invest in a stock that just missed an earnings; Probaly not.