What Is Dividend Yield And Dividend Payout Ratio?

What Is Dividend Yield And Dividend Payout Ratio?

As lingering concerns and uncertainties over the developments onEurope’s debt crisis continued into the first half of 2012 against the backdrop of low growth and low interest rate environment, the consensus among many research and fund houses for investors is to stay defensive and pursue a yield-oriented investment strategy. Investors get to participate in potential share price appreciation while earning a regular income in the form of dividends well above the paltry interest rates on bank deposits.

So, what is Dividend Yield and Dividend Payout Ratio?

Dividend Yield measures the rate of return in the form of cash dividends while Dividend Payout measures the proportion of a company’s net earnings that are being distributed as dividends to shareholders. Dividend Payout thereby offers an indication of the company’s ability to maintain the level of dividend payment. They are computed as follows:

where Annual Dividends Per Share exclude the one-off special dividend payout (where applicable) since it does not constitute a shift in the company’s dividend policy.

Example:
If the dividends per share of a company is $0.50 per annum and the stock is trading at $10.00 per share, the stock currently gives a yield of $0.50 / $10.00 x 100% = 5.00%. With an Earnings Per Share of $0.80 for the year, the company has a Dividend Payout Ratio of $0.50 / $0.80 = 0.625 times.

Dividend-based or Income-based Investing

Dividends are of great interest to income-oriented investors who seek a minimum and regular income stream from their investment. Dividend-paying stocks may also appeal to investors with a smaller risk appetite as they are typically stocks of well-established and stable companies in mature industries with modest growth opportunities. This is especially so in times of market downturns or market uncertainty where capital gains in the stock market are hard to come by.

Moreover, unlike share price appreciation, which is determined by numerous factors including non-fundamental influences such as market sentiment and momentum as well as the global economies, dividend returns represent actual cash payout by companies to their shareholders in accordance with the company’s dividend policy. Dividends thus provide investors with a steady return even at times when share prices are volatile. Furthermore, stocks with high and stable dividend yields tend to be more resilient or resistant to a decline in price in market downturns than lower-yielding stocks because they are in effect “yield supported”. Hence, investors are more willing to hold on to these high dividend yielding defensive stocks through a bear market.

Considering the hefty financial commitment required of the company in paying stable cash dividends to its shareholders at regular intervals over time out of its earnings, dividend-investing strategy can assist investors in sifting out companies with steady earnings and good financial health. The company’s ability to make regular or steadily increasing cash dividends over time is also an indication of confidence in the company’s future business prospects.

In current times of low interest rate environment, investors also look to dividend-paying stocks as attractive substitutes for offering better returns on investment.

Nevertheless, not every company pays dividends. Rapidly growing companies are likely to retain most or all of their profits for reinvestments into the business in the hope of creating shareholder value through share price appreciation and capital gain. Hence, Dividend Yield does not provide for a meaningful evaluation for such companies.

What to look out for in High Dividend-Yielding Stocks?

As with all other financial metrics, investors should not rely solely on a single metric in stock evaluation. High Dividend Yield can be a result of a substantial fall in the share price relative to the same level of annual dividend payments. Thus, investors should always keep in mind the following considerations when investing in high dividend-yielding stocks:

  • Consistency of the company’s dividend payment history. Companies with a credible track record of stable or rising dividends payments over time are preferred over erratic dividend payment history to provide the safety buffer income-oriented or value investors are seeking.
  • Sustainability of the company’s current high Dividend Yield.

    Investors ought to pay heed to the company’s ability in sustaining its current level of yield and the prospects of increasing the level of dividends in the future by looking at its Dividend Payout policy. Rapidly growing companies and companies where earnings fluctuate with the economic cycles tend to have lower Dividend Payout Ratios while the converse applies to companies in mature industries. Nonetheless, a high Dividend Yield together with a low Dividend Payout Ratio suggests that the company has enough room to sustain its dividend when times get tough and is thus favoured.

    As dividends are ultimately paid with cash not earnings, investors should check a company’s Dividend Payout Ratio against a comfortable margin of free cash flow to ensure that the payout is sustainable.

Where can I find the Dividend Yield and Dividend Payout Ratio at ShareInvestor?

There are numerous ways for you to access the Dividend Yield and Dividend Payout Ratio at ShareInvestor.

1. Dividend Yield for every listed company can be easily found under the Fundamentals section of the Factsheet.

Source: ShareInvestor.com

As the market price per share changes, the Dividend Yield changes as well assuming a contant level of dividend payments. Hence, investors should always attempt to look further into the underlying factors that cause the change in Dividend Yield.

2. Dividend Payments as proposed by the listed company over the recent 5 years can be easily found under the Dividend History section of the Factsheet.

Source: ShareInvestor.com

This company has consistently been raising its annual dividend payments over the recent 5 years with an occasional one-off special dividend payment as a form of optimizing its capital structure in years where there are greater cash inflows. This offers an attractive risk-reward profile for investors who seek dividend stability in difficult times and dividend growth for long-term compounding.

3. Dividend Payout Ratio for the listed company over the years can be easily found under the Adjusted Fundamental Data section of the Financials.

Source: ShareInvestor.com

In light of its future growth prospects and steady operating cash flows to sustain its dividend payments, the company has been steadily increasing its dividend payout from its net earnings to its shareholders over the years (Dividend Payout Ratio: 0.658 times for Full Year Mar 2011 as compared to 0.578 times and 0.577 times for Full Year Mar 2010 and Full Year Mar 2009 respetively).

4. Dividend Yield for the industry can be easily found under the Sector Comparison section of the Factsheet.

Source: ShareInvestor.com

The stock (Dividend Yield: 5.076%) is trading close to the industry average (Dividend Yield: 5.264%), indicating it offers relatively attractive yield compared with its peers. As compared to the broader market as represented by the Straits Times Index (STI), the industry offers typically better Dividend Yields.

5. “Fundamental” and “Ratios” table column layout under Prices and Portfolio.

Source: ShareInvestor.com

Source: ShareInvestor.com

Source: ShareInvestor.com

There is a “Fundamental” (for price multiple ratios) and “Ratios” (for other ratios) column layout under Prices and Portfolio. By selecting this view, you will be able to see the Dividend Yield and Dividend Payout Ratio of a stock and compare it with other stocks using a variety of filters and selection.

In addition, if you would like to have your own customised columns in your portfolio, you can also add the Dividend Yield and/or Dividend Payout Ratio fields into your selection under the “Edit Custom” column layout.

6. Fundamental filters under Prices.

Source: ShareInvestor.com

Under the Fundamental dropdown selection, the following selections are made available to you to assist you in finding swiftly the stocks with the highest Dividend Yield and Dividend Payout Ratio in the market.

– Highest Dividend Yield
– Highest Dividend Payout

Lastly, here is an interesting article on “A Year For Dividend Investing In Asia” (The Business Times, 28 December 2011).

 

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