Importance of dividend yield when evaluating a stock?
But I wish to know why the parameter is dividend/market price rather than just 'dividend'? What 'extra' info you can uncover by looking at dividend/market price that you cannot get from 'dividend'? Consider two stocks A and B. A offers a dividend of $1 per year. B offers a dividend of $2 per year. Let's remove all complications aside and assume that this trend continues. If you were to buy each of these stocks you will get the following amounts over its life (assumed infinity for simplicity): cash flows from A = $1/(0.04) = $25, assuming risk free is 4% per annum cash flows from B = $2/(0.04) = $50, assuming risk free is 4% per annum The price you buy them at is an important factor to consider because let's say if A was trading for $10 and B for $60, then A would look like a profitable nvestment while B won't. Of course, this is a very simplistic view. Dividend rates are not constant and many companies pose a significant risk of going bust but this should help illustrate the general idea behind the D/P ratio. P.S.:- The formula I have used is one for computing the NPV of a perpetuity. The dividend yield can be used to compare a stock to other forms of investments that generate income to the investor - such as bonds.  I could purchase a stock that pays out a certain dividend yield or purchase a bond that pays out a certain interest.  Of course, there are many other variables to consider in addition to yield when making this type of investment decision. The dividend yield can be an important consideration if you are looking to invest in stocks for an income stream in addition to investing in stocks for gain by a rising stock price. The reason to use Dividend/market price is that it changes the dividend from a flat number such as $1 to a percentage of the stock price, which thus allows it to be more directly compared with bonds and such which return a percentage yeild. "Dividend yields can also reflect important information about the company's status. For example, a company that has never lowered or stopped paying dividends is a ""strong"" company because it has the cash/earnings power to maintain its dividend regardless of the market. Ideally, a company should pay dividends for at least 10 years for an investor to consider the company as a ""consistent payer."" Furthermore, when a company pays dividend, it generally means that it has more cash than it can profitably reinvest in the business, so companies that pay dividends tend to be older but more stable. An important exception is REIT's and their ilk - to avoid taxation, these types of funds must distribute 90% of their earnings to their shareholders, so they pay very high dividends. Just look at stocks like NLY or CMO to get an idea. The issue here, however, is two fold: So a high dividend can be great [if it has been paid consistently] or risky [if the company is new or has a short payment history], and dividends can also tell us about what the company's status is.  Lastly, taxation on dividend income is higher than taxation on capital gains, but by reinvesting dividends you can avoid this tax and lower your potential capital gain amount, thus limiting taxes.  http://www.tweedy.com/resources/library_docs/papers/highdiv_research.pdf is an excellent paper on dividend yields and investing." "Probably the most important thing in evaluating a dividend yield is to compare it to ITSELF (in the past). If the dividend yield is higher than it has been in the past, the stock may be cheap. If it is lower, the stock may be expensive. Just about every stock has a ""normal"" yield for itself. (It's zero for non-dividend paying stocks.) This is based on the stock's perceived quality, growth potential, and other factors. So a utility that normally yields 5% and is now paying 3% is probably expensive (the price in the denominator is too high), while a growth stock that normally yields 2% and is now yielding 3% (e.g. Intel or McDonald'sl), may be cheap." Dividends yield and yield history are often neglected, but are very important factors that you should consider when looking at a stock for long-term investment. The more conservative portion of my portfolio is loaded up with dividend paying stocks/MLPs like that are yielding 6-11% income. In an environment when deposit and bond yields are so poor, they are a great way to earn reasonably safe income.
Dividend yields are a product of the dollar amount paid to shareholders and the stock price. Dividends yields rise when a company is shunned by investors. It may be shunned because the earnings and/or dividend are at risk. Recent examples are SDRL and KMI. Most investors  would love an 8% yield so I would wonder why the stock is being ignored or shunned. Check out the questions about why stock prices are what they are. In a nutshell, a stock's value is based on the future prospects of the company. Generally speaking, if a growth company is paying a dividend, that payment is going to negatively affect the growth of the business. The smart move is to re-invest that capital and make more money. As a shareholder, you are compensated by a rising stock price. When a stock isn't growing quickly, a dividend is a better way for a stockholder to realize value. If a gas and electric company makes a billion dollars, investing that money back into the company is not going to yield a large return. And since those types of companies don't really grow too much, the stocks typically trade in a range and don't see the type of appreciation that a growth stock will. So it makes sense to pay out the dividend to the shareholders. "&gt;  If the stock price goes down it wouldn't make sense that ABC had a higher dividend yield, so my argument was you have to make assume the stock price went down because it could have cost less for other reasons, but you don't have to assume the dividend yield which would make it a good investment.   I'm not sure I understand your argument. The wording doesn't seem clear to me (""you have to make assume""? make assume? ""but you don't have to assume the dividend yield"" assume it what?)  Dividend yield has a negative correlation with stock price. If price goes down, all else being equal, yield rises." Used in our day to day activities is going out the house and get something more important that our family desires. But since the economy is not achieving a lot today, thinking about the top dividend stocks is essential. One component that ought to be looked at is the charge.   If you're accustomed with buying what you see without even going through the package price, you must modify the way you live your life. Persistence is very necessary for you to be able to find the top dividend stocks. When possible, you should get a less costly alternative on the costly items you utilized to purchase. Be persistent and also save money! Usually when a company is performing well both its share price and its dividends will increase over the medium to long term. Similarly, if the company is performing badly both the share price and dividends will fall over time. If you want to invest in higher dividend stocks over the medium term, you should look for companies that are performing well fundamentally and technically. Choose companies that are increasing earnings and dividends year after year and with earnings per share greater than dividends per share. Choose companies with share prices increasing over time (uptrending). Then once you have purchased your portfolio of high dividend stocks place a trailing stop loss on them. For a timeframe of 1 to 3 years I would choose a trailing stop loss of 20%. This means that if the share price continues going up you keep benefiting from the dividends and increasing share price, but if the share price drops by 20% below the recent high, then you get automatically taken out of that stock, leaving your emotions out of it. This will ensure your capital is protected over your investment timeframe and that you will profit from both capital growth and rising dividends from your portfolio. I had read a book about finance, and it had mentioned that you can gain big profits from investing in the best companies in the most boring markets, like the funeral business for example. These markets are slow growing, but the companies pay a good dividend. Many books recommend investing in dividends because of the compound growth and stable income. Remember that at the end of the day, you should put the same amount of research into buying a stock as you would buying the entire company. With that being said, you may find a great company that may or may not offer dividends, but it should not be of great significance since you feel you are buying into a great company at a fair price. Though dividend growth is a great tool to use to see if a company is doing well. In the equity world, if a stock trades at 110 and is going to pay a dividend of 10 in a few days, an option expiring after the ex date would take the dividend into account and would trade as if the stock were trading at 100. (Negative) interest rates may also lead to a similar effect. In the commodity world the cost of carry needs to be taken into account. I would say that the answer is yes.  Investors may move on purchasing a stock as a result of news that a stock is set to pay out their dividend.   It would be interesting to analyze the trend based on a company's dividend payouts over 10 or so years to see what/how this impacts the market value of a given company.