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 $2.40
As you can see Home Depot has a high dividend yield not just because of the high dividend it is paying but because the high dividend relative to its share price. If the share price were to increase by 10% the dividend yield would drop to 2%. Additionally, if the share price dropped by 10% the dividend yield would increase to 2.44%.
Again, you can see that Home DEpot and Lowes have dividend yields of 2.15% & 1.48%, respectively. Now, if you took their share prices and switched, you’d end up with a dividend yield of 3.75% for Home Depot (6/159.82) and 0.87% for Lowes. The dividend yield can be affected by a change in either share price or dividend payout.
I view the dividend payout as a gauge to determine how good the share price is in relation to what they payout in dividends. As I stated before, this is just one of the factors I use to decide what stocks to invest in.
Of course, there still are other factors that I look at, such as, P/E Ratio, EPS, & PEG. I also start with companies that have a large MOAT. I don’t prefer to invest in companies which may have an uncertain future, regardless of how much they pay in dividends. But overall, it starts with the Dividend Yield.
So, yesterday was the first day for the IPO for Snowflake Inc. ($SNOW). I always wanted to try to get in on the ground floor for companies that go public. I figure that they start out small and as they prove their ability to perform and generate revenue their stock price tends to go up. When I heard about Snowflake Inc going public I started following in hope of being able to get in on the ground floor.
The first time I heard about the tentative stock price was when they were talking about it being around $23/share. Seems reasonable. I could afford that. That wasn’t an overly large amount of money and I could come up with a few dollars to buy some shares to try my hand at investing in a company just starting out trading shares. I couldn’t screw up too badly at $23/share.
But the day before the IPO and the day of the share price was scheduled to open at $120/share! What happened? Then when the market opened and I checked how it was doing I found that the stock price had climbed to over $230/share. What?!?!? What did I miss? I can’t understand how the price could have jumped that high. What was the new price based on? Were that many people buying the stock? I read all of the reports and articles about the company but I wasn’t able to determine which factor was the key to driving the price.
So, how does it work? The share prices are based on the company fundamentals up to a certain point and then it becomes like a religious thing and faith takes over? Or is it one of those deals where the big players get in on it early, wait for the share price to peak and then when it starts dropping in price start selling off their shares to insure profits? Is it all big money investors or are there any small investors? If so, are they able to keep up with the trade activity in order to not lose everything?
I’m still new at this investing game so I try to learn whateveer I can so I can better understand the way things work.
The answer to the question will depend on your investing strategy and your goal. Speaking for myself, I prioritize on dividend yield with an eye on stock price. Regardless of either one, the stability and longevity of the company is paramount. I’m the type of person that would have missed out of Tesla when it first came out. I don’t speculate/gamble with my money. My goal is to create an income stream from my investment where I can stop working (I am overdue to officially retire and I still work because I have bills to pay). Now, in order to reach that goal my strategy is to invest heavily in dividend stocks (those stocks that pay you cash dividend periodically). If the company hasn’t paid any dividend consistently for 5 years, I’m just not going to seriously consider investing my money with them. Am I missing out on some tremendous windfall profit? Probably. But then I’m missing out on all those tremendous jackpots because I don’t go to casinos, either. When I look at a stock or fund I look to see what they are paying and how often. I then look at the stock price and determine if the stock price is worth paying to get that dividend. Again, this is a subjective determination for me. I don’t believe that there’s a right or wrong answer. Two people can look at a stable company that has been in business for a long time (i.e. Coca Cola or Intel) and based on the criteria I used, one person can decide that the stock price is worth it while the other one feels that it isn’t. Their choices based on their goals, strategy, and comfort zones.
I’ve come across a few stocks/funds that someone said was a great investment based on the dividend yield. The last one I encountered was YYY (Amplify ETF TR High Income ETF). The stock price is cheap at approx. $15/share. The dividend yield is at 10.39%. Very high. In the relationship to the share price this comes out to about $1.56/share. So for $1500 you can buy about 100 shares of this ETF and get $156 in dividends. Sounds great? To me the one factor that makes me pause is the Expense Ratio (both Gross & Net). It’s at 2.17%. I like my expense ratios below 0.10%. This is a deal-breaker.
In addition to dividend yields & payouts, and price shares I’m looking at expense ratios. I don’t want to invest in a fund with high dividend yields that end up being eaten up by fees. The dividend history and growth are also important to me. What about share price? Well, it is important in determining how many shares I can buy and the future acquisition plans going forward. If the share price drops it’s an opportunity to buy more (barring that all other factors remain basically the same) shares and collect even more dividends. If it goes up than the value of my shares increases and I still get to collect dividends.