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The dividend yield

One return on shares: dividend yield

By calculating the dividend yield, you have the opportunity to compare the performance of different stocks that also pay dividends.

Dividend yield

Why is stock yield important?

Just because you said yes to a stock, you also said yes to its risk. Even if in most cases businesses are relatively stable, you have nevertheless become one of the owners of a company, and at the same time you are risking all of your invested capital.

Investors’ willingness to take risks can be achieved with the available extra return, otherwise you would definitely prefer to look for much safer forms of investment (eg corporate bonds or government securities).

You can earn returns on stocks in two branches: through exchange rate movements, and through dividends paid.

Companies that go through rapid exchange rate growth typically either don’t pay dividends, or at least not as much as other businesses, after all, here your profits typically come from exchange rate movements.
If, due to the size of the company (or for any other reason), there is no possibility of rapid expansion, the payment of dividends as a return option will pave the way for the company’s securities to be attractive to investors.

Calculation of dividend yield

You can also use this indicator for analytical purposes for companies whose dividend policy is sufficiently stable. That is, dividends paid are either relatively constant or increase steadily.

Dividend yield: Dividend per share for the current year / current share price

It is important to always contrast the dividend paid in a given year with the current market rate. What happened last year or just when the company went public is irrelevant for comparison and decision making.

Example:
Dividend per share: HUF 500
Current price of 1 share: HUF 15.000
Dividend yield: HUF 500 / HUF 15.000 = 3,33%

What you calculate only on self-diligence.

You can calculate the dividend yield on the purchase price you pay for your existing shares, but do so only on your own. If you bought a stock 10 years ago for a fraction of the current price and you calculate the return for that, of course it will come out a much higher value than if you were counting at the current price.

You can read in the writing on the time value of money that you can’t compare non-simultaneous cash flows just “with impunity”.

After all, the amount paid 10 years ago showed the state of the business 10 years ago at the exchange rate 10 years ago. Since then, the price of everything has risen due to inflation, and it is possible that the company has also developed, which has changed the proportions of its exchange rate. Although you have fixed the current purchase price for you at the time of purchase, if you want to compare it to anyway, do at least the present value calculation.

What is the dividend yield suitable for?

Comparison of two shares

When you want to build an investment portfolio that also provides you with income through dividend payments, it is natural that you want to get the highest return available at a given level of risk.

The price of shares provides an opportunity to show buyers and sellers an insight into the value of a company. If you examine the dividend payment rate compared to this gives you the opportunity to examine the yield levels.

Comparison of the company to the industry

You can also compare the amount of dividends paid by companies operating in a particular industry to the performance of the industry as a whole.
If the performance of the selected company is a bit higher compared to its own industry, you can see that the company is stable compared to other similar companies, so they can afford generosity.

Estimate the level of risk of the company

At the previous point, I emphasized that the yield was only slightly higher. What happens when you see one company’s dividend yield rise suddenly and significantly?

You have already seen in the dividend yield calculation that this is a quotient. Its value can increase significantly in two cases:

  • the amount of dividends paid increases significantly, but the exchange rate is stable: this is a very rare case, after all, a dividend that is expected to increase significantly is priced by the market, so the exchange rate also follows
  • the price of a given firm’s securities falls significantly: in this case, the market considers the firm risky and sells the shares. And the increased supply leads to a fall in prices.

Accordingly, if the level of return increases, it is legal to refer to negative changes in the life of the given enterprise. It doesn’t have to be long lasting, it can just be an excellent buying option, but it deserves special attention.

What dividend yield is considered adequate?

As a general rule (if you take international practice as a basis), the yield on treasury bills will be the same as the dividend yield in the long run. This will be mostly around treasury bond yields.

So if you ask me if I don’t find the dividend yield of around 4% low, the answer is no. If your question is how decent I consider the 12% to be, then the answer is that here you have to look at the whole thing thoroughly, because the extra return outlook can be attractive, but at the same time you also get extra risk for your money.

Let’s differentiate between when someone says they have achieved an average annual growth of 10-12% with stocks, and when someone says a dividend yield of 3% in the example mentioned above. In the first case, it is the return resulting from an increase in the exchange rate, not the return determined as the quotient of the dividend paid and the exchange rates.

When you see that the dividend yield is permanently below the yield on government securities, it is an indicator that the stock or even the entire sector is starting to become overvalued.
Make no mistake, this is a general rule. Growth-focused firms (e.g., technology firms) can never follow this, after all, if they did, the price of their shares would see a detriment.

Questions:

  1. When you build your own investment portfolio, what is the weight of the dividend?
  2. What do you think what is the premium compared to the industry that still falls into generosity and not extra risk?
  3. What role do stocks play in your own portfolio?

If you have any questions, please contact us so we can help you.

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