Investing basics;  Dividend and Yield

Perhaps you have decided that the best place to put your money is in a savings account or a CD (certificate of deposit) at your local bank.  If so, you are likely familiar with the term YIELD.  Generally, rates are advertised for accounts and CDs, the bank is advertising the rate at which they will pay you to hold your money for one year (or other term).  A reasonable quote now might be 1.5% annual percentage yield.  What does this yield have to do with the yield of stocks? 

When referring back to your local source of financial information, be it the newspaper, or a financial website, one or two columns will read DIV/YIELD…. or some variation of this.  DIV stands for dividend, a neat little term for the money paid to the stock owners at some regular interval, generally two-four times a year.  So, you can have money in a stock, and still be paid on it?  Interesting…yet this is where the yield from the stocks comes into play.    Dividends from stock companies are a way of the company returning the current profit to the shareholders of the stock.  It is a way for them to keep their balance sheet from showing too much profit, as well as ‘thanking’ the stockholders for their belief in the company.  Generally a stock owner has the option of reinvesting in more shares of the stock, or of adding the cash to their account value (dividends may also be given in shares, rather than straight cash).  Be aware that if your dividend paying stock is in a taxable account, you may be subject to a tax penalty.

Dividends play into the yield of a stock, by being a source of revenue while the stock is held.  Those familiar with bonds are well aware of the relationship between dividend and yield, but it is slightly different for stocks.  Yield on a stock is calculated on the amount paid in dividends compared to the price per share of the stock.  Two stocks may both pay $2.00 per share in annual dividends, but if one stock trades for $20, and the other for $200, there is a huge difference in the yield.  The stock trading for $20/share, with a $2 dividend would have an annual yield of 10%, whereas the other would have an annual yield of 1%. 

Finding a stock with a dividend and yield may not be for you.  Perchance you are looking for companies that are more aggressive, and reinvesting their money, rather than paying shareholders.  If you are on a fixed income, finding stocks with good dividends may be a wise way to add to your portfolio.  As always, research the companies and their historical dividends/yields to get a good sense of their stability and value.   A stock company paying 1% in dividends may be a better investment than your aforementioned CD or savings account, depending on your time horizon and risk tolerance.