Tuesday, March 31, 2009

STI: What is a dividend yield?

March 29, 2009


What is a dividend yield?


Where do you see this?


In company announcements and newspaper reports.


What does it mean?


Dividend yield tells you what percentage the stock returns relative to its price.


It can be calculated by taking annual dividend per share divided by the stock's price per share. Thus, if the price drops and if the dividend stays the same, the yield will rise.


For investors who like to have a steady cash flow from stock investments, the dividend yield is one basic indicator to identify high dividend corporations.


Singapore stocks that come with attractive dividend yields include StarHub and Singapore Post.


Why is it important?


One might be tempted to buy stocks with high dividend yields for their hefty payouts, but note that buying such stocks is not without its risks. The reality is that when the going gets tough, companies can slash dividends.


For example, some major American financial institutions that have cut their payments showed an uncanny pattern of dividend cuts and then massive failures. Examples include Fannie Mae, Freddie Mac and Lehman Brothers.


A high dividend yield does not necessarily mean a dividend decrease is near. Do not just buy stocks based on their yield. Check if the company is healthy and has good cash flow. A company can pay a dividend only if it has the cash flow to support it.


So you want to use the term, just say...


'I'm tempted to buy that stock because of its high dividend yield, but my broker says I should consider other factors too.'


Gabriel Chen

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