dividend yield
One of the biggest things that I look for in a stock is whether or not it offers a dividend, and how it may be. Looking for a dividend is a common strategy that many people implement Some people really underestimate the value of having dividends. When they buy shares, the one thing they are looking for is growth. In other words, they are looking for the company to skyrocket. However, you should not only be buying shares for growth, but rather for income as well. When we are talking about buying shares for income, we are talking about dividends. Before we talk about how we can calculate the dividend yield, let's actually get a bit more information on what a dividend is. A dividend is extra cash that the company pays out to its shareholders. From a company's perspective, a dividend can be an extra incentive for outside investors looking to potentially purchase shares in the company. The dividend is decided and managed by the directors of a company. This means that every year or so, they are going to sit down and take a look at the profits of the company and see if they want to pay out dividend. Here, they also decide how much they want cash they want to give out as dividends, and see if they already have a dividend, if they want to increase or decrease the dividend amount. A dividend is generally paid either every quarter, month, 6 months, or annually. Now, as an investor, you want to see the dividend as a return on your investment. And to do this, I am going to use the company AT&T. Okay, so the dividend of AT&T is 1.84, well this number alone can sometimes be misleading and I'll tell you why later, but what we really want to know is the return on our investment, which is also known as our yield. But first, let's think about what 1.84 represents, this number represents that we will get 1 dollar and 84 cents whenever AT&T pays out its dividend per share. So, that means if I buy one share of AT&T, when the company pays out a dividend, I will receive 1 dollar and 84 cents. Likewise, let's say I bought 10 shares of this company, I would get 18 dollars and 40 cents. Now that we know what the dividend number signifies lets move onto to the more important number, the yield. To do this, I would take the dividend figure 1.84 and divide it by the current stock price, which for AT&T is 35.39. When we do the math, I get about 5.2% rounded. As we go over to Yahoo Finance to crunch the exact percentage, we find that we did our math spot on even with rounding. Now, this 5.2% yield signifies the return we would get on our investment. This is similar to how you get a return when you put money into a savings account. Based on interest rates, you will get a percentage of what your return would be. Anyway, now we must move onto the task of figuring out what this means. Is this a good number, or is this yield lacklustre? Something that you should do before you judge this yield, is look at the yield of competitors in the same sector, and see, maybe if they have a higher yield, or if they even offer a dividend at all. So, let me just think of some competitors off of the top of my head, Sprint, T-Mobile, and Verizon. Those are just three examples of companies that may compete with AT&T in the telecommunications sector. As we first check Sprint, we see that they don't even offer a dividend to investors, so that gives AT&T an edge right there. As we move on to T-Mobile, we see that T-Mobile doesn't have a dividend either. Now lastly, let's check Verizon and see if they have offer a dividend. Yes, now Verizon is the only main competitor of AT&T that actually offers a dividend, and their yield is 4.3%, which is still not as good as the dividend that AT&T has. So, in terms of competitors, it is quite easy to see and understand that AT&T has a very good yield in relation with its competitors, however remember that is not the only thing. What you can also do, is check the average dividend yield of a stock trading in the NYSE, as AT&T does. But, we won't cover that in this video. Overall though, a dividend yield of 5.2% for AT&T is looking very nice based on not only the sector, but also based on other stocks' usual dividend yield which for the most part are under AT&Ts.
Now before we go off and purchase, we have to be careful when a company is paying out a very high dividend yield. We have to ask ourselves, why is this dividend yield so high? And this is to ensure that we don't fall into a dividend trap. The telecommunication sector isn't one that generally is expected to have a too high, or too low dividend yield versus other sectors, so this is one key element that we can knock off so that we make sure that this dividend yield is not a trap. Another question you may want to consider is, is my dividend yield safe? In other words, can the company sustain this dividend yield, or for whatever reason are they going to have trouble financing this dividend. For most companies you would have to dig a bit deeper into their business, but if you go into the history of AT&T, you can see that this is a distinguished dividend aristocrat. Now, to be classified as a dividend aristocrat you need to follow the following criteria: You have to be a company in the S&P 500 that has raised its dividend every year for shareholders for the past 25 years. This is the most prestigious list of dividend stocks, and this is why this reputation shows that AT&T can sustain their dividend, and have consistently and steadily increased it.
Now before we go off and purchase, we have to be careful when a company is paying out a very high dividend yield. We have to ask ourselves, why is this dividend yield so high? And this is to ensure that we don't fall into a dividend trap. The telecommunication sector isn't one that generally is expected to have a too high, or too low dividend yield versus other sectors, so this is one key element that we can knock off so that we make sure that this dividend yield is not a trap. Another question you may want to consider is, is my dividend yield safe? In other words, can the company sustain this dividend yield, or for whatever reason are they going to have trouble financing this dividend. For most companies you would have to dig a bit deeper into their business, but if you go into the history of AT&T, you can see that this is a distinguished dividend aristocrat. Now, to be classified as a dividend aristocrat you need to follow the following criteria: You have to be a company in the S&P 500 that has raised its dividend every year for shareholders for the past 25 years. This is the most prestigious list of dividend stocks, and this is why this reputation shows that AT&T can sustain their dividend, and have consistently and steadily increased it.