How do you calculate dividends

Dividend yield: calculation and interpretation

Many investors today speculate on possible price gains and often forget that a number of companies are now paying dividends to shareholders.

High returns can be achieved with dividends alone.

The dividend yield - a valuation indicator for the valuation of shares - increases with a rising dividend or a falling share price.

Conversely, if the dividend falls or the share price rises, the dividend yield falls.

Calculation of the dividend yield

The dividend yield sets the dividend in relation to the share price. To calculate the dividend yield, the dividend per share is simply multiplied by 100 and then divided by the share price.

An example calculation: IBM pays, for example, a quarterly dividend of 0.85 US dollars per share, so the annual dividend adds up to 3.40 US dollars.

Most recently, the IBM share price was quoted at around \$ 210. This results in a dividend yield of 1.62%.

Interpretation of the dividend yield

In theory, of course, a high dividend yield is better than a low one. However, you should note that the companies themselves determine the amount of the dividend and the payout ratio.

For a correct interpretation of the dividend yield, it is important to know the reasons for the dividend amount.

The amount of the dividend payment also essentially depends on the company policy, i.e. to what extent the company is willing to let the money it generate flow back to the shareholders.

A high dividend yield, for example, does not allow any conclusions to be drawn about the profitability of the company or the quality of the profits generated.

Tech companies often have low dividend yields

Many companies, especially in the high-tech sector, pay little or no dividend at all, even though they generate very high profits.

Instead, technology companies very often invest their profits in research and development as well as in new innovations and products. Keep this in mind when interpreting dividend yield.

A good example here is the Mac manufacturer Apple.

Although Apple has been rushing from one record profit to the next with the iPhone since 2007, the company has only started paying a dividend since the spring of 2012 and decided to pay a quarterly dividend of \$ 2.65 (\$ 10.60 per year).

The dividend yield at Apple is comparatively low at around 1.6% percent, although the company has enormous earnings power.

A very high dividend yield can even be interpreted as disadvantageous, since the distributed profits cannot be used in the operative business to optimize returns.

However, there are major industry differences, so that large differences in dividend yields can also be observed in practice.

When interpreting the dividend yield, you should keep the following in mind: Larger companies with lower growth rates tend to pay higher dividends than small, high-growth technology companies.

However, it would be wrong to judge a company's growth prospects solely on the basis of a company's dividend yield.

Dividend Yield: Profitability and Management Confidence

A high and rising dividend yield can express the profitability of the company, even if there is no guarantee that high dividends will also be paid in the future.

However, a dividend increase can be interpreted as a certain level of management confidence in future business developments.

A dividend cut or a complete cancellation, on the other hand, signals negative corporate health.

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