Dividend Yield

What is a dividend yield and how is it calculated?

When analysing the market for a high-quality dividend stock an important metric to consider in the dividend yield. The dividend yield assesses the annual dividend a company pays in relation to its share price.

Dividend Yield (%) = Dividend per Share / Share Price

Lets apply this by looking at Absa. Absa currently pays a quarterly dividend of R2.81 per share. Thus, on an annual basis we can expect to receive R11.24 (R2.81 x 4) for each Absa share we own. Absa is currently trading at a share price of R197. The expected dividend yield for Absa is thus calculated as follows:

Dividend Yield (%) = Dividend per Share / Share Price

= 11.24 / 197

= 5.71%

It is important to note that the current dividend yield of a company alone should not be the driver of your investment decision. When looking for a high-quality dividend stock it is also important to look at the dividend yield over time and whether this is consistent or volatile. The current dividend yield of a stock may appear higher than what is sustainable for the company for one of the following reasons:

1. The dividend yield may be elevated due to a temporary drop in the share price (assuming the dividend per share is constant a drop in the share price will increase the dividend yield)

2. A special once-off dividend declared by the company due to an unbundling or proceeds from disposal of non-core assets

3. Abnormally high earnings for the year that is not expected to be sustained into the future (this is often the case with commodity shares which trade at high dividend yields when commodity prices are high)