Tuesday, December 12, 2006

Dividend yield

For a list of dividend stocks (as of Jan 2009), see Free Cash Flow and Dividend Stocks.

Dividend yield is the stock dividend per share (DPS) divided by its share price. E.g. if Company A gives 10c dividend in 1 yr and its share price is $1, then its dividend yield is 10%.

Alas, as we can guess, it is very unlikely that a stock will be able to sustain a 10% dividend yield for long periods. The simple reason being that if it does payout 10% handsomely forever, why would the original owners list the company? They might as well keep it private and keep the 10%. There are times when the market collapse and dividend yield hits 10% but it is unlikely to remain cheap for long as the stock would rebound quickly. But if you do find one in the current market, let us know! So that we can all buy. Huat Ah!

Globally market dividend yield ranges from 2-4%, but some individual companies do give much higher yield (usually that also mean the company has not much growth prospect). In Singapore the average dividend yield is also around 3-4%, which is not much higher than fixed deposit rate, but actually quite ok by global standards.

Personally I think dividend is very important because it may be the only form of incremental income for a value investor (who prefers to buy and hold stocks). If a company does not pay dividend, there is no way to get cash out of your investment except by selling the shares. But if you would like to hold the shares because you think the company will continue to grow, what can you do? Value investors also need cash to buy groceries right? Not much use holding on to stock certificates until you are one leg into the coffin, isn't it?

Also, by paying dividend, the company shows that it has its shareholders in mind. Excess capital is always returned to shareholders if it cannot be put into better use. Of course, a growth co. needs ALL the money to invest and grow, and they don't pay dividend. Investors sometimes take that excuse, but usually also taken for a ride. However some growth company do grow big and when they are ready, they pay dividend as well, e.g. Microsoft.

However, Berkshire Hathaway has never paid dividend since Singapore got independent because its owner-manager, our hero Warren Buffett, thinks that he can use put the money into better use. And he has done that.

Since most if not all companies are not like Berkshire, we should expect them to return investors some of the money the firm has earned.

See also Company cheatsheet
and Earnings yield
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