Dividend Yield

What is Dividend Yield?

Dividend Yield is an essential metric for investors interested in earning passive income through dividends distributed by companies. It represents the profitability of dividends relative to the current stock price and is expressed as a percentage.

What Does Dividend Yield Represent?

Dividend Yield represents the profitability of dividends in relation to the stock's price. This metric shows how much shareholders are receiving in dividends relative to the current stock value.

As mentioned, only the current stock price is considered in the Yield calculation. So if you bought the stock at half the current price, your proportional Yield will be double. This is known as Dividend Yield on Cost.

How Is Dividend Yield Calculated?

The calculation of Dividend Yield is simple: just divide the value of dividends paid in the last 12 months by the current stock price and multiply the result by 100 to get the percentage value:

Importance of Dividend Yield

For investors seeking regular income, Dividend Yield is an attractive indicator. Stocks with high Dividend Yield indicate that the company is distributing a larger portion of profits to shareholders, making them more attractive to this type of investor.

Limitations of Dividend Yield

Despite being useful, Dividend Yield has its limitations. It does not consider the growth potential of the stock price or the history of dividend payments by the company. Companies with high Dividend Yield may face financial difficulties or be distributing unsustainable dividends, requiring a deeper analysis.

In summary, Dividend Yield is a relevant metric for evaluating the return provided by dividends, but it should be used in conjunction with other analyses for solid and informed investment decisions.

Importance of Dividend Yield

Dividend Yield is an important metric for investors looking for passive income through dividends. It helps assess the attractiveness of a stock in terms of profit distribution to shareholders.

Investors aiming for regular income through dividends may prefer stocks with a higher Dividend Yield, indicating a greater distribution of profits by the company to shareholders. This metric is a valuable tool in the search for investments that offer consistent and sustainable returns.

Limitations of Dividend Yield

Although Dividend Yield is a useful metric, it's important to understand its limitations. It does not consider the growth potential of the stock price or the history of dividend payments by the company.

A very high Dividend Yield may indicate that the company is facing financial difficulties or distributing dividends beyond its sustainable capacity. In such cases, it's crucial to analyze other metrics and information about the company before making investment decisions.

The Yield is calculated based on the payments of the last 12 months, so if there has been a sectoral crisis or a downturn in the company itself that has significantly lowered the stock price, the Dividend Yield is likely to be very high. As "past performance is not indicative of future results," if the company paid good dividends and is now facing problems, there is no guarantee that it will continue to pay, which may be one of the reasons for the low stock price, as the market tends to try to predict the value of the next payment.

At the same time, for trusted companies going through a rough patch, it might be a good time to "buy when there's blood in the streets" and have a good Yield on Cost. However, this should be done after a thorough analysis of the company's fundamentals.

Examples

MPW:

Medical Properties Trust, Inc. is a Real Estate Investment Fund (REIT) that invests in healthcare facilities.

In September 2023, it was trading at around $ 8.00, while its distributed income in the last 12 months amounted to $ 1.16. Thus, we can calculate the Dividend Yield:

Just by looking at this value, it seems like we'd have a great return. However, it's important to note that there has been a significant drop in this fund in the previous 12 months, both in value (50%) and in income distribution (51%). When we use the income distributed in the 3rd Quarter ($0.15) projected over the next 4 Quarters for the Dividend Yield calculation, and the current stock price ($ 7.00), we get:

Hence, it's more probable that the future Dividend Yield will hover around 8% rather than 14.5%, particularly due to the company's ongoing financial challenges, which could potentially lead to bankruptcy. It's essential to recognize that this risk is reflected in the REIT's current value, as in a "normal scenario," the company would likely trade at around $20.00, yielding 5.8% annually. This critical factor must be taken into consideration before making any purchasing decisions, whether for a REIT or a stock.