Dividend Yield Essentials
Do you know how much we spend on Christmas lights and decorations?
$6 billion a year.
By comparison, the Pentagon spends about $12 billion for an aircraft Carrier like the USS Ronald Reagan.
The numbers are staggering, so huge they’re hard to make sense of.
I like simpler numbers where the arithmetic is easy, and that’s one of the reasons why I’m so fond of dividend stocks.
The arithmetic behind the yield is about as simple as it gets. You divide the amount of the dividend by the stock price and you’ve got it.
The yield is expressed as a percentage.
And once you know this number, you’ve opened up a whole new way of finding the best dividend paying stocks.
Let me give you the 3 dividend yield essentials. Then we’ll use them to find the kind of highly profitable dividend stock a lot of people chasing high yield would overlook.
Dividend Yield Essential #1
Chasing high dividend yield, and buying the highest dividend stocks, won’t always get you the best return.
Yield constantly changes. Remember, the price of the stock is one of the two factors that determine the yield.
When the stock price goes up, the yield goes down. And when the stock price goes down, the yield goes up.
This means that a company in trouble, where the stock price is tanking, will be paying a higher yield, even if it keeps the dividend the same.
If a stock trades at $50 today and the yield is 4%, the yield goes to 8% if the price of the stock falls to $25 and the dividend payment stays the same.
If a stock trades at $50 today and the yield is 4%, the yield goes to 2% if the price of the stock goes up to $100, and the dividend payment stays the same.
Here’s some more simple arithmetic that can keep you focused on the best high yield stocks.
Dividend Yield Essential #2
When the dividend payment goes up and the stock price stays the same, the dividend yield goes up.
This is why dividend growth is such a big deal for investors. Stock yield matters more when you see growth that comes from the increase in the dividend, and not the decline in the share price.
How much dividend growth is good? It changes all the time. Back when the market was going through so much trouble in 2009, there wasn’t any dividend growth because so many companies were cutting dividends.
These days, annual dividend growth of at least 10% is good.
Dividend Yield Essential #3
There is no exact definition of high yield stocks.
As a rule of thumb, when you get into a yield that’s 10% or higher, you’re in dangerous territory.
It’s usually safer to wait for a low yield to grow, which turns it into a high yield for you.
It’s how you put the power of compounding to work – so over time so you build a portfolio of the best high yielding stocks.
Want to see how this works, and how profitable it can be?
How A Low Dividend Yield Turns Into A High Yield
Let me introduce you to a dividend stock that pays an embarrassing yield… much less than 1%.
Most dividend investors wouldn’t give this “ugly” stock a second look. And while I’m not suggesting you run out and buy it, there’s a profitable lesson to learn from this virtually unknown company based in Murray Hill, NJ (Exit 44).
The exact yield for this company might be higher or lower depending on the day you read this, but today, the yield is .51%. Yup… just over half a percent.
C.R. Bard $BCR is the skinflint of the S&P 500 Dividend Aristocrats, the lineup of America’s safest, strongest, and most dependable dividend stocks.
As I write this, no Aristocrat pays a lower dividend than C.R. Bard.
But here’s the thing. Only a handful of companies make the cut and get to be Aristocrats. These large cap companies have been growing their dividend for at least 25 years.
It sounds easy but it’s not. And C.R. Bard has managed to pull it off for 43 years.
For the past three years, the annual growth in the Bard dividend has been 5.1%.
These numbers aren’t terribly exciting. Not at first glance.
But they are extremely important.
Let’s say you bought Bard three years ago. You’ve got your 5.1% dividend growth.
And you’ve also got a stock that’s been doing very, very well…
At the beginning of 2013, this was a $103 stock. Today it trades at $187.
That’s 26% annual growth in the price of the stock, on top of your dividend.
Low yield doesn’t mean you always get this kind of stock price growth. There’s not a connection.
But it does mean that like you learned in Dividend Yield Essential #1, when the stock price goes up and the dividend stays the same, yield is driven down.
At Bard, the dividend actually grew at 5.1% a year.
And if you took the money from your dividend payments and bought more stock, you would have made out even better.
It’s a great example of how dividend reinvestment plans really work.
So you come out a winner three ways – capital appreciation from the increase in value of your shares, the dividend growth, and the extra stock you add to your portfolio when you reinvest the dividends.
But if you never even think about a stock like C.R. Bard because you think the yield is too low, you miss out.
Now that you know the essentials of yield, you can go find your own C.R. Bard.
And if you’re wondering where to start, check out the low yield stocks on the lineup of the S&P 500 Dividend Aristocrats.
Cordially,
Paul Duke
Dividend Stocks Research
Note: Paul Duke writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Category: Dividend Stocks
