Normal Levels of Dividend Yield
- The dividend yield for a stock is a simple calculation. If you take the combined annual dividend and divide it by the price of a single share of stock, you get the company's dividend yield. For example, dividends are usually paid each quarter. If the company pays a 10 cent dividend, the annual dividend is 40 cents. If the share price is $20, divide .40 by 20, which gives you a 2 percent dividend yield.
- Not all companies pay dividends. Some companies choose to reinvest their earnings for future growth. Typically, dividend-paying companies are large, well-established companies, such as companies represented by the S&P 500 index, which contains the 500 largest companies in the U.S. markets. At the time of publication, 24 S&P 500 companies paid at least a 5 percent yield and at least half paid a yield higher than 2 percent.
- There are two basic types of stock a company can issue. Most stocks are common stock, but a company can also issue preferred stock, which comes with a guaranteed dividend. Preferred stocks typically pay higher yields than common stocks. According to "USA Today," since 1900, preferred stocks have paid investors 7.4 percent annually. Keep in mind though, according to New York University, if you combine share price growth and dividends, common stocks have earned on average more than 11 percent per year since 1928, outperforming preferred shares.
- Dividend yields are not fixed. The company can choose to increase or decrease them at will. This is even true with preferred stocks, which under certain conditions can be converted to common stock without gaining permission from investors. Companies that pay above average yields can be attractive to investors looking for a reliable income source, but if the yields are too high, investors risk future dividend cuts as the company seeks to save money. When a stock's dividend is cut, it can cause share prices to decline as well, leading to investor losses. This is especially true for dividend yields above 10 percent.