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How to Understand Dividend Yield

Yield (also known as dividend yield) is your dividend’s rate of return, and one of the most important numbers to consider. It enables you to compare stocks side-by-side, ensure that a particular stock meets the minimum return requirement for your portfolio, and avoid stocks that have comparatively high dividends (in dollars) but low returns (in percentage).

Don’t confuse dividend with dividend yield. The cold, hard cash that lands in your pocket every quarter is the dividend. Yield is the annual percentage return in dividends on your investment.

Yield is a huge consideration for two reasons:

  • It indicates the minimum rate of return you can expect to earn on your shares.

  • It determines whether you can expect this investment to beat inflation. If inflation is running at 3 percent and the yield is only 2.5 percent, you stand to lose 1/2 percent per year to inflation. (Of course, if the share price rises, too, your return may still beat inflation.)

Some fund managers like their dividend stocks to provide a yield double the yield of the S&P 500 index. You can find this yield on the index on Standard & Poor’s Web site. Visit http://www.standardandpoors.com/home/en/us and click Indices, and then under S&P 500, click View Data. Regardless of what some fund managers look for, set your own minimum standards for your portfolio, and if the yield falls short, don’t buy the stock.

Avoid “great story” stocks that capture the headlines but pay tiny dividends. Examining a stock’s yield is a great way to screen out these poor performers.

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