Tuesday, March 24, 2015

How do you measure dividend yield?

Hi Everyone,

I have been wondering how do people calculate their dividend yield because there are two main ways that I have seen people in the hardwarezone forum, in the stock and indices section, calculate the dividend yield. 

There are two main ways that people calculate (of course there might be other ways which I do not have knowledge of). 

The first way is through current price of the share price. 

For example, I buy Stock A price at $1 and the annual dividend is around $0.05, at this point of time, my dividend yield would be 5%

However, few days later, my share that I bought, raise from $1 to $2, based on the current price, my dividend yield now would be 2.5%. 

This is the first way, for the second way, I would use my average cost price to calculate dividend yield. From the above example, if I do not purchase any shares further, I would still have my 5% dividend yield. 

So why are there people use the first method and some people using the second method? The reason is because for using first method, the investors can make a solid decision on whether or not the share provides a good dividend yield as compared to other shares. (Mainly for comparison, especially for investors who are aiming to generate passive income).

As for the second method, it is just mainly for personal tracking of our own dividend yield which ignores the current market price. 

Well, each people has their own way to calculate dividend yield and I do respect that but do remember to check properly when asking people for advice based on dividend yield, because you will need to know how they calculate their dividend yield in the first place :D


8 comments:

  1. Hi James

    First scenario represents yield on cost and they are generally useless for me, just like average costs, to make decisions matter. They are only useful to track your own performance.

    Decisions to buy or sell should always be based on latest valuations and price, sometimes even projected.

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    1. Hi James,

      Like B said, current price to give present day dividend yield is quite important, especially if you think that investors make buy and sell decisions based on the current yield. (I personally think that REITs are particularly sensitive to the prevailing yield on their heads, more so than other stocks)

      I think more people talk about dividend yield as being the current yield based on ttm DPU and current prices. Yield on cost is easier for personal tracking, since it only changes when ttm DPU changes, and not daily, which would be the case if you are tracking your own investment / portfolio's current yield.

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    2. Yea would be right, if deciding whether or not to purchase, we would need to look at the current price, if calculating our own dividend yield, we would need to calculate based on our cost

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  2. Hi James,

    Dividend yield is always calculated on current price. Taking you example, if stock price is $1 and dividend $0.05, then the dividend yield is 5%. Now, if stock price becomes $2 and dividend remains same, then the yield becomes 2.5%. At this point,whether to invest more, we are looking at 2.5% and the earlier 5% is irrelevant.

    Cheers,
    Farmer.

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    1. But if we want to calculate based on what we have bought? because I tot the amount that we put in determines the yield?

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  3. Our margin of safety is the difference between our Yield on Cost and current market dividend yield.

    When our Yield on Cost is so higher, do we want to be itchy backside to search for their replacement?

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    1. of course not, if high then keep it hahaha

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  4. yea it would be hard to compare between two coy, but it will be even harder to just compare with dividend yield because some company might give higher yield because of instability of their company.

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