The dividend yield of a stock measures the amount of cash that owning a stock is expected to generate each year relative to the price of the stock. Knowing the dollar amount of dividends a stock pays is helpful, but without knowing the dividend yield, it’s hard to compare dividends. For example, a $5 dividend might sound better than a $3 dividend, but if the stock that pays the higher dividend cost $100 and the other stock only costs $20, the lower-priced stock has the higher-dividend yield.

If you know the dividend yield and the dividends paid, you can calculate the price of the stock. Alternatively, if you have a certain dividend yield that you need to obtain, you can calculate the maximum amount you’re willing to pay for a stock based on the dividends it pays out.

## Calculating the Stock Price

To calculate the price of a stock from its dividend yield, you also need to know how much it pays in dividends each year. Therefore, first, you need to **add up all of the dividends the company paid during the prior year**. Second, **divide the annual dividends by the dividend yield** to find the stock price.

If you’re looking for a minimum dividend yield on your investments, the stock price you calculate is the maximum you can pay to obtain the desired dividend yield.

## Looking at a Sample Calculation

For example, say a stock pays quarterly dividends of 50 cents and you only want to invest if it pays a dividend of at least 4 percent. First, multiply 50 cents by four because it pays four dividends per year to find the total dividends per year are $2. Second, divide $2 by 0.05 to find the maximum stock price to have a dividend yield of at least 5 percent or $40. If the stock were over $40, the dividend yield would be **less than 5 percent**.

## The Significance of Dividend Yield

The dividend yield is especially significant for investors looking to build a fixed income portfolio because it **measures what percentage of your investment you can expect to get back each year**.

For example, if your portfolio has an average dividend yield of 4 percent, for every $1,000 invested, you can expect to earn $40 in dividends each year. Therefore, if you needed to earn $20,000 in dividends each year, you’d need to have a portfolio worth $500,000. If you could obtain a dividend yield of 5 percent, you would only need a $400,000 portfolio.

**MORE MUST-CLICKS:**

- How to Calculate Expected Dividend Yield
- Dividend Paying vs. Dividend Yield
- How to Calculate a Stock Portfolio Yield
- How to Calculate Rate Earned in Common Stock
- How to Calculate the Average Yield on Investments
- How to Add Up Your Stock Shares
- CAPM Vs. DDM
- How to Calculate Percentage Increase of a Stock Value