What’s so important about the dividend yield? Why do I focus on it equally with the stock price? As a dividend investor I like to have my money work for me with little effort or worry. All investments come with risks. I like to mitigate mine. I do this with dividends. With dividends I don’t rely solely on share price to receive a return on my investment. Also, dividends are what I get paid to have my money tied up for the long term.
What does the dividend yield mean to me? How does it relate to my own investment strategy? I look at the dividend yield as a way to determine how good the stock price is in relation to the dividends being paid. The higher the yield the better the stock price is in relation to the dividend. Let me explain using 2 stocks.
Div Yd Share $ Div $
Home Depot ($HD) 2.15% $272.81 $6.00
Lowes ($LOW) 1.48% $159.82 $2.40
As you can see Home Depot has a high dividend yield not just because of the high dividend it is paying but because the high dividend relative to its share price. If the share price were to increase by 10% the dividend yield would drop to 2%. Additionally, if the share price dropped by 10% the dividend yield would increase to 2.44%.
Again, you can see that Home DEpot and Lowes have dividend yields of 2.15% & 1.48%, respectively. Now, if you took their share prices and switched, you’d end up with a dividend yield of 3.75% for Home Depot (6/159.82) and 0.87% for Lowes. The dividend yield can be affected by a change in either share price or dividend payout.
I view the dividend payout as a gauge to determine how good the share price is in relation to what they payout in dividends. As I stated before, this is just one of the factors I use to decide what stocks to invest in.
Of course, there still are other factors that I look at, such as, P/E Ratio, EPS, & PEG. I also start with companies that have a large MOAT. I don’t prefer to invest in companies which may have an uncertain future, regardless of how much they pay in dividends. But overall, it starts with the Dividend Yield.