by Marc Bastow | August 29, 2013 9:15 am
An industrious and curious retiree wrote to ask me a question that arose while she pored over a recent brokerage statement:
“When a stock says ‘dividend rate’ how does that differ from ‘dividend yield?’ When you get a dividend for a stock (holding) which number are you getting? For example: if the dividend rate is 1.4 (sic) and the dividend yield is 3.3%, what am I getting?”
Very good questions. Let’s try to take the confusion out of your statement.
The dividend rate is simply the total amount of money you should receive from a stock or other dividend-yielding asset over the course of a year.
Let’s use Exxon Mobil (XOM) as an example: XOM’s dividend is 63 cents per share. Since XOM pays a dividend quarterly, its dividend rate is $2.52. (If XOM had a tendency to pay out special dividends every year, you would include that into the equation … but it doesn’t, so you don’t.)
Dividend rate is very simple math. It’s not as popular for evaluating stocks as yield, which we’ll cover here in a second, but if you’re already in a stock, dividend rate can give you a good idea of the nominal amount you can expect to be paid in a given year.
The dividend yield is also a simple math calculation: Annual dividends/current price. Again, let’s take XOM: Its most recent payout was 63 cents, and it makes payouts quarterly, so that comes out to $2.52 annualized. As of this writing, XOM was trading at $88.84, so $2.52 / $88.84 = 2.83%.
That percentage has a very important application — it’s used as a proxy to measure return against competing assets, particularly other dividend stocks and bonds.
For instance, if you compare that 2.85% return against a competitor in Exxon’s space like ConocoPhillips (COP) — which yields 4.12% in dividends — XOM looks like a lesser investment.
Of course, dividend is merely one measuring stick of many, and certainly shouldn’t be the only reason you invest in a company. Depending on other factors you come across as you do your homework, you might actually decide that while Conoco might offer more return in regular cash payouts, Exxon actually has more total return potential once you factor in capital appreciation.
How about bonds? Well, the 10-year Treasury actually yields 2.78% right now, which is a mere 5 basis points less than Exxon. However, the question you have to ask yourself then is “Which is riskier?” Namely, is the slight uptick in yield worth the risk in investing in a stock, which can move up and down over time (and theoretically go bankrupt, though Exxon’s not even in slight danger of this right now)? After all, if you hold that 10-year Treasury to maturity, you receive both the interest and your original investment.
So yes, you’re getting two different things with those numbers, and knowing their differences (and how to apply them) is important.
Hope this all helps out, Mom.
Do you have a question? Send it along, and we’ll try to help out.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long XOM.
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