How is Dividend Determined?

• The board of directors of a corporation determines the amount of a common stock dividend, if any, quarterly.
  
  

How is Yield Calculated?

• The yield is calculated by adding up the last four quarterly dividends and dividing the amount by the current stock price. For example, if the annual dividend is $1 and the current stock price is $20, the current dividend yield is five percent.
  
  

The Yield Fluctuates with the Stock Price

• The amount of dividend is set in dollars. If the stock price rises to, say, $30 per share, the current dividend yield will decline to 3.3 percent. The opposite is true if the stock price declines.
  
  

Yield as a Tool

• Yields are used to compare investment returns. Investors are interested in future income but the current dividend yield does not always give the full picture. For example, a corporation has a history of increasing dividends, and the dividends paid in the preceding four quarters were 25, 28, 32 and 40 cents--$1.25 in total. There is a high probability that the dividend will be increased again next quarter, but you don't know by how much. Or what if a corporation in financial difficulties pays a quarterly dividend of 25, 23, 18 and 10 cents and then suspends the dividend? If the stock price is $20, the current dividend yield is 3.8 percent, but there will be no dividend going forward.
  
  

High Yielding Stocks

• Since the yield is the function of a fixed dividend divided by a changing stock price, an unusually high dividend yield is caused by a drop in the stock price. If the high dividend is not enticing investors, the company may be in financial trouble and the dividend is likely to be cut or eliminated.
  
  

Yield vs. Capital Appreciation

• It is not a good idea to evaluate stocks based solely on yield because stock prices can gain or lose a lot more than an investor can get from dividend income.