Quick thread on Dividend Yield.

Dividend yield just tells you what % return you will get on a stock from the dividend alone if you were to buy the stock at X price.

I am using the graphic below, but I haven’t done the math/tally myself. Looks legit tho.

#FinanceTwitterJa https://twitter.com/mr_cw_/status/1199796568632832000

The formula is:

Annual Dividend / Share Price.

For eg:
- Company A share price today: $10
- Over the next 12 months, they pay $0.50 in dividends total.

For every $10 you spent, you got back $0.50 during the year.

So your return was 5% ($0.50/$10).

Dividend yield is a great indicator to pay attention to when deciding how to construct your portfolio.

It is important to note that the Dividend Yield is in addition to the capital gain/loss.

So taking the above example, say end of year Company A share price: $12.

Your total return for the year would be as follows:

Capital Gains/Loss + Dividend Yield

Cap Gains ($) = $12 - $10 = $2
Cap Gains (%) = $2/$10 = 20%

So Total Return = 20% + 5% = 25%.

If you had a 1% capital loss (ie the price dropped by 1%), total return would be: -1% + 5% = 4%.

So dividend yield is just another indicator you can use to determine the return on investment a particular stock will provide.

It is relatively uncommon for a dividend yield + capital gain to be very high at the same time.

Primarily because as the price increases (which gives you your cap gain), the dividend yield falls (because dividends tend to be fixed, and not based on the stock price).

Remember dividends tend to be paid out of earnings, so if a stock price doubles but earnings hasn’t doubled it is very difficult/unwise (in most situations) for the company to double its dividend just to preserve the yield.

That doesn’t make much sense and may be a yellow flag.

If a company does that, and it isn’t clear that they have a lot of excess cash lying around, then it tells me they may be trying to hide poor operating performance so I may want to dig deeper into the company to figure out what’s going on.

$SGJ.ja has had extraordinarily high dividends for the last few quarters, so it is not surprising to me that they have the highest yield on the market.

Then again, they have about $100B in cash on their balance sheet between “retained earnings” and “accumulated surplus”.

So paying extraordinary dividends doesn’t worry me for them.

Plus every year they are still profitable and adding a few B$ in cash to their cash pile so they are good to go.

If you are looking for dividend income, say you are a pensioner, you may want to pay attention to the dividend yield because it is straight income (cash). Plus you get any upside if the stock goes up.

In some cases, like $SGJ.ja, the dividend yield can be higher than...

..another fixed income instrument.

It is more risky because it is equity and the stock price can fall, also dividends aren’t guaranteed. Mgmt can cut dividends and change the dividend policy at any time, but it is something to consider and look at.

So all of the above is one of the main reasons that when ppl ask me for stock picks or whatever, I always tell them to do their own research and talk to a licensed financial advisor. Not only because I can’t legally give buy/sell advice, but also because the optimal portfolio...

for you is heavily dependent on your personal circumstances.

Do you need high dividend yield or do you want high cap gains? What’s your risk tolerance like?

What is your portfolio size? What does your income look like?

All of these things are factors.

So it is best you either learn yourself or get personalized advice from a licensed professional.

I think most ppl can learn. It won’t be easy and there will be a learning curve, but there are so many more tools available.

The internet has a lot of free resources. We have robust discussions on #FinanceTwitterJa and give away a lot of free advice and many of us have classes.

I have video recordings of classes that you can purchase, @rtrowe always does classes, so does @Devrhoid.

With a little dedication and effort, you can change your financial future.

Don’t be daunted and don’t let this opportunity pass you by.

//END

Another thought, you can use dividend yield to construct your income too.

For example, say you wanted to earn $1M per year, if you have a stock paying 5% dividend yield, you would need to buy $20M (which is $1M / 5%).

So that’s another way you can think about this stuff too.

And once you identify that’s the strategy you want, and you have identified the company that pays those dividends, you can optimize it so that you don’t have to spend the full $20M by watching for buying opportunities when the stock price is down due to mkt sentiment...

not fundamental changes to the company.

Ie assuming revenue and profits are still growing and margins are expanding or holding firm, then when the market pulls back and you want to get to your $1M target you can buy more to help you get there below the $20M.

Once you understand what you are doing, there are many tools you can use to get the results you want.

That’s why we push education so hard on #FinanceTwitterJa.