Demystifying the economy |  How is the stock dividend yield calculated?

Demystifying the economy | How is the stock dividend yield calculated?

Every Saturday, one of our journalists answers, in the company of experts, one of your questions about economy, finance, markets, etc.

I would like to know on what basis the dividend yield per share is calculated in the stock information, day by day.

michael boisvert

Before explaining the calculation of the dividend yield of shares on the stock market, we must first remember the origin of the dividend in the accounting and financial management of companies.

“A dividend is a cash portion of a company’s profits that is distributed to shareholders,” explains the Banque Nationale Courtage Direct (BNCD) firm on its website.

“As a rule, dividend-paying stocks are issued by mature companies with regular and reliable earnings. Therefore, they can pay a part in the form of a dividend. [aux actionnaires] while the rest is used for other financial management purposes: debt payment, share buyback, reinvestment in the company, etc. »

Rate of return

That being said, how is the dividend yield of a listed stock calculated?

Essentially, a stock’s current dividend yield is obtained by dividing the total annual dividend amount by the current stock market price of the share, explains Desjardins Brokerage online on its website.

“For example, a company whose shares are trading at $100 and paying a dividend of $6 per share offers a current return of 6% on its shares, explains Desjardins.

“As the price of a stock goes up or down, its current dividend yield moves inversely. »

In addition, for the calculation of the dividend yield of the shares already invested in a portfolio, it is the acquisition cost of these shares that should be used as a divisor of the most recent total and annual amount of the dividend paid.

This type of calculation can be useful to calibrate the evolution of the dividend yield of the shares in the portfolio against the current rate of return of the same shares, according to their listing on the stock market.

Also, what is the use of the dividend yield for equity investors?

Many investors view regular dividend payments as a form of rental income while they wait for the stock price to rise, or, conversely, as a form of compensation while they wait for the stock price to recover after a bearish episode. .

Extract from the BNCD web portal

“In a context of stock markets with limited short-term upside potential and inflation that remains high, holding dividend-paying stocks can be a great way to improve current returns on equity investments,” recalls Hugo Ste-Marie. , director. of Portfolio Strategy and Quantitative Analysis at Scotiabank World Markets in Montreal, in his recent report Outlook 2023.


Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Research at Scotiabank World Markets in Montreal

However, Mr. Ste-Marie cautions, “simply buying stocks with above-average dividend yields is not an optimal investment strategy.”

Why ? “Because it doesn’t always protect [la valeur des actions en portefeuille] in the event of a slowdown in the activity of the affected companies, and greater risk of a reduction in their dividends. »

Alternatively, Hugo Ste-Marie points out, “market analysis shows that the stocks of companies used to regular increases in their dividend perform better over time.”

“These companies with a well-established dividend policy are often in lower-risk, less-cyclical industries. However, these characteristics become advantages in a context of increasing risk of recession, when optimistic expectations of earnings growth or dividend per share may not materialize in the more cyclical sectors of the stock market. »

Do you have questions about personal finance, the world of work, the stock market, finance, technology, management or any other related topic? Our journalists will answer one of them every week.

#Demystifying #economy #stock #dividend #yield #calculated

Leave a Comment

Your email address will not be published. Required fields are marked *