Dividend Rate vs. Dividend Yield: An Overview
A dividend is the total amount of money that an investor receives as income from owning shares of a company, or another dividend-yielding asset, during the fiscal year. The dividend rate is another way of saying dividend. More specifically, when you hear people talking about dividends in dollar figures in the media, or elsewhere, they are referring to the dividend rate.
Alternatively, stock dividends can also be quoted using the dividend yield, which is expressed as a percentage. You can think of the dividend yield as the percent return that an investor would expect to earn on their investment based on the current share price.
Dividend-paying stocks are very popular with investors because they provide a regular, steady stream of income. Companies that experience big cash flows and don’t need to reinvest their money are the ones that normally pay out dividends to their investors.
Dividend-rich industries include companies in the healthcare and energy sectors, essential consumer product producers, household goods producers, food and beverages, and utilities. In 2021, some of the big names that paid out dividends included:
- Apple Inc. (AAPL)
- The Coca-Cola Co. (KO)
- ExxonMobil Corp. (XOM)
- Verizon Communications Inc. (VZ)
- Pfizer Inc. (PFE)
- McDonald’s Corp. (MCD)
- A company’s dividend or dividend rate is expressed as a dollar figure and is the combined total of dividend payments expected.
- The dividend yield is expressed as a percentage and represents the ratio of a company’s annual dividend compared to its share price.
- You are more likely to see the dividend yield quoted than the dividend rate because it tells you the most efficient way to earn a return.
What Is a Dividend Rate?
One of the ways to calculate how much income an investor receives from an investment is the dividend rate. This rate is the combined total of dividend payments expected. These dividends may come from stocks or other investments, funds, or a portfolio. The dividend rate is generally expressed on an annualized basis. Additional dividends that are not recurring may not be included in this figure.
Dividend rates are expressed as an actual dollar amount and not a percentage, which is the amount per share that an investor receives when the dividend is paid. The rate may be either fixed or adjustable, depending on the company.
Here’s an example: Let’s assume that Company X’s stock pays an annual dividend of $4 per share in four quarterly payments. So for each payment, an investor receives a dividend of $1. The dividend rates are $1 per quarter and $4 annually. Quarterly dividends are the most common for U.S.-based dividend-paying companies. However, some companies will distribute dividends annually, semiannually, or even monthly.
When the dividend rate is quoted as a dollar amount per share, it may also be referred to as dividend per share (DPS). You can usually see the accounting history of a company’s dividend payments in the investor relations portion of its website.
There are other kinds of dividends as well. Some companies choose to pay out dividends in the form of extra stock or even property. Companies may do this when they decide they want to pay out dividends but need to hold on to some extra cash for liquidity or expansion.
Most high-growth companies, including those in the tech or biotech sectors, do not pay investors dividends.
What Is a Dividend Yield?
Another way to determine investment income is through the dividend yield. This represents the ratio of a company’s current annual dividend compared to its current share price. Generally speaking, when the dividend remains the same and the share price drops, the dividend yield rises. The yield will fall if the stock price rises.
The dividend yield is quoted as a percentage rather than a dollar amount by taking the annual dividend, dividing it by the share price, and multiplying that number by 100. Unfortunately, the calculation for dividend yields presents some problems. Dividend yields can vary wildly, so the calculated yield may actually have little bearing on the future rate of return (ROR). Additionally, dividend yields are inversely related to the share price, so a rise in yield may be bad if it occurs only because the company’s stock price is plummeting.
As an investor, you are more likely to see the dividend yield quoted than the dividend rate. The initial reason for this makes sense: A company that pays out dividends at a higher percentage of its share price is offering a greater return for its shareholders’ investments. It is better to receive $3 in dividends on a $50 stock than $5 in dividends on a $100 stock because the investor could ostensibly just purchase two of the $50 shares and receive $6 in dividends that way.
The dividend yield tells you the most efficient way to earn a return. Unsurprisingly, the dividend yield is one of the most common metrics used by income investors for comparing different income-paying assets.
What is more important: dividend rate or dividend yield?
At first glance, the terms “dividend rate” and “dividend yield” may sound like they are quite different. However, upon closer examination, investors quickly learn that the two metrics are both important and connected.
The root of each metric is the underlying need for investors to understand the amount of reward that they are expecting to earn in the form of dividend payouts over the fiscal year. Which one is more important will really come down to use case. Dividend rate is stated in dollar terms. Dividend yield is stated as a percentage of the dividend rate divided by the current price.
What is dividend rate?
The dividend rate, also known as the dividend, is the amount of money received by the investors as income due to owning shares of a dividend-paying company. Not all companies pay dividends, so it is not uncommon to see the value of “n/a” on quote pages across the financial media. A value of 2.50 means that the company is expected to pay $2.50 per share to its shareholders over the course of the fiscal year, whether in quarterly installments, semiannually, or yearly.
What is a good dividend yield?
Dividend yields will vary by sector and industry. Some dividend yields may seem insignificant at first glance, while relatively high yields—say, more than 5%—often get much attention.
What makes a dividend yield good is highly subjective and subject to change based on market whims. However, what is important to note is that small amounts paid out over decades can often be much more lucrative than short-term payments that draw attention but may not be sustainable over the long term.
The Bottom Line
A company’s dividend or dividend rate is expressed as a dollar figure representing the full amount of dividend payments expected. Meanwhile, dividend yield is a percentage representing the ratio of a company’s annual dividend compared to its share price.
Both metrics are important for equities investors. While the dividend rate indicates total expected income, the dividend yield provides more information on the rate of return and can be useful in comparing different income-paying assets.
As an enthusiast with in-depth knowledge of financial concepts, particularly dividend investing, I can provide insights into the distinctions between dividend rate and dividend yield, shedding light on their significance for investors.
Dividend Rate: The dividend rate, often used interchangeably with dividend, is the total amount of money an investor receives as income from owning shares of a company or another dividend-yielding asset during the fiscal year. It is expressed as a dollar figure and represents the combined total of expected dividend payments. The rate can be fixed or adjustable, depending on the company's policies. For instance, if a company pays an annual dividend of $4 per share in quarterly payments, the dividend rate would be $1 per quarter and $4 annually.
Companies may choose to pay dividends in various forms, such as extra stock or property, depending on their financial strategies. The dividend rate provides investors with a clear understanding of the income they can expect from their investments.
Dividend Yield: On the other hand, the dividend yield is expressed as a percentage and represents the ratio of a company's current annual dividend to its current share price. It is a key metric for investors as it indicates the efficiency of earning a return on their investment based on the current market conditions. The dividend yield is calculated by dividing the annual dividend by the share price and multiplying the result by 100.
Investors are more likely to see the dividend yield quoted because it offers insights into the most efficient way to earn a return. A higher dividend yield suggests a greater return for shareholders relative to the share price. However, it's crucial to note that dividend yields can vary widely, and a rise in yield may not necessarily translate to a better rate of return if it is driven by a drop in the stock price.
Comparison and Importance: Both dividend rate and dividend yield are vital metrics for equity investors. The dividend rate provides a clear dollar figure of the total expected income, while the dividend yield offers a percentage that helps investors compare different income-paying assets. The choice between the two depends on the investor's use case.
In conclusion, understanding the nuances of dividend rate and dividend yield empowers investors to make informed decisions in the realm of income investing. These metrics play a crucial role in evaluating the potential returns and efficiency of an investment, contributing to a comprehensive investment strategy.