It's always good news when you buy a stock and it appreciates in value. However, capital appreciation on your investment can take a while. If the stock pays a dividend, that's extra income that you earn in the meantime. Investors focus on a company's dividend because it is a steady source of income, particularly for retirees. Typically, faster-growing companies eschew paying dividends altogether to save money. On the other end of the spectrum, mature companies often pay a larger portion of their income as dividends to shareholders.
Step 1
Calculate the company's annual dividend payout. You can do this by adding the quarterly dividend payments. You can also look up a company's dividend using a financial website or retrieve the information from the company's annual report. Divide the dividend by the current stock price. For example, if a company pays an annual dividend of $1.10 per share and the stock price is $25 per share, the dividend yield is 4.4 percent.
Step 2
Compare the company's current dividend yield to the dividend yield over time. Rather than use the current stock price, divide the annual dividend payout by the price of the stock at the end of each year. This shows how the company's dividend yield tracks each year.
Step 3
Select a peer group of companies as a measuring stick to see how the company's dividend yield stacks up. For example, if the stock is a utility company, calculate the current and historical dividend yield of other utility companies for comparison purposes. This tells you if the company's dividend yield is on par with the industry.
Step 4
Calculate the dividend payout. The dividend payout is the ratio of dividends to earnings. While the dividend yield is useful, it could also be misleading because it is a function of the company's stock price, which fluctuates on a daily basis. A high-priced stock's dividend yield will always be lower than that of a low-priced stock if their dividends are the same, which is why calculating the dividend payout is important. Divide the annual dividend by annual earnings per share. For example, if the dividend is $1.10 and EPS, or earnings per share, is $3.40, the dividend payout is 32.4 percent. Compare the company's dividend payout over time and with the industry group to see if the company's payout is above or below average.
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- A dividend policy is how the company manages its dividend payout to investors. A dividend could remain flat, meaning it does not change much from year to year, or it could increase. You can obtain information about a company's dividend policy in its annual report and regulatory filings. In some cases management may decide to decrease the dividend or issue no dividend to save money. It's important to keep tabs on a company's dividend policy to get a sense of what's happening with the company. A cutback on the dividend is a red flag for investors.