Dividend Yield – Calculation and Significance

What Is the Dividend Yield?

The dividend yield indicates what percentage of the current stock price an investor receives as a dividend payout. It is one of the most important ratios for income-oriented investors and a central component of the Finanzoo F-Score.

Calculation

Significance in the Finanzoo F-Score

In the Finanzoo F-Score, the dividend yield is weighted at 10%. Not only the current yield is assessed, but also the continuity of dividend payments and consecutive increases. Companies that reliably pay dividends over many years and steadily increase them receive higher scores.

Dividend vs. Price Gains

Dividends are an important part of a stock's total return, alongside price gains. Especially in sideways or bear markets, regular dividend payments can secure a stable income stream. Reinvested dividends have an enormous effect over the long term due to the compound interest effect.

What Should You Watch Out For?

• Payout ratio: If more is paid out than earned, the dividend is not sustainable.
• Free cashflow: Dividends should be covered by free cashflow.
• Debt level: Highly indebted companies can quickly cut dividends.
• Dividend continuity: Years of stable or growing dividends are a strong quality signal.

Dividend Aristocrats

Companies that manage to continuously pay and increase their dividend are referred to as dividend aristocrats or dividend stars. Investors reward the high reliability of the dividends paid here. Above all, the performance of continuing to pay a dividend to shareholders even in difficult times, such as severe economic crises, is highly valued by investors.

Note the Tax!

Dividend payments are taxable in most cases. Depending on the country, the tax rate varies. Often the applicable tax is deducted directly by the custodian bank, before the dividend is paid out to the shareholder. In some countries, the tax paid can be reclaimed by German shareholders. The respective special rules must be observed here.