What is Dividend Yield? | Investing 101

What is Dividend Yield? | Investing 101


I’m sharing an easy explanation to the question,
“What is Dividend Yield?” using Apple dividends and some of the biggest risks to
dividend stock investing. I’ll not only show you how to calculate
the dividend yield quickly but reveal five dividend stock strategies for higher returns
without the risk. We’re talking dividend yield today on Let’s
Talk Money! Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money. Joseph Hogue with the Let’s Talk Money channel
here on YouTube. I want to send a special shout out to everyone
in the community, thank you for taking a little of your time to be here today. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. Probably no other measure in dividend investing
is as popular or dangerous as the dividend yield. It makes sense, right? That’s your cash return and investors are
all about getting as high a return as possible. In this video though, I’ll explain the dividend
yield, how to calculate it and some risks around it. We’ll talk about what is a good dividend
yield and then I’ll reveal five dividend investing strategies you can use for solid
returns. This is hugely important not just for dividend
investors but for all stock investors. I’ve gotten a lot of questions about our
2019 dividend stock portfolio, why I only filtered for stocks paying a 3% yield or higher
instead of going for the really high yielding stocks. You only need to look at that 24% total return
in just the first four months to see that it’s all about balance to getting the highest
total return. Five of our dividend stocks are up over 35%
so far with Hanesbrands surging 67%. A stocks dividend yield is the cash return
you get on the investment on a yearly basis. Now that’s important because most stocks
pay their dividend four times a year but only pay a fourth of that annual yield. So you might see a 3% dividend yield and receive
a dividend every three months but you’re only collecting that portion of the annual
yield. Let’s look at an example with the Apple
dividend because it gets much easier when you see it applied. We see here that besides having a VERY good
day after reporting first quarter earnings, Apple is trading at $214 per share. This forward dividend and yield reported here
is for the entire year’s payments, so investors should expect to receive $2.92 in dividends
for every share of Apple they own. What you will actually receive is $0.73 every
three months but remember we use the annual number to calculate the dividend yield. So if we take that $2.92 in dividends received
over a year and divide by the current $214.16 share price, we get a dividend yield of 1.36%. It says 1.54% here as the yield and that’s
an important point you want to remember. This 1.54% yield is based on the stock price
yesterday so it hasn’t updated on today’s big move. Understand that as a stock’s price increases,
if the company doesn’t also increase the dividend payment then the dividend yield will
go down. Conversely if a stock’s price falls and
the dividend payment stays the same, the dividend yield will go up. If Apple shares were to fall to $175 each
and the dividend stayed at $2.92 a year, then investors would be getting a 1.66% yield. This uncovers one of the biggest risks in
looking at just the dividend yield. If you see a high dividend yield, you also
need to look at the stock price over the last year. If the shares have been falling and the dividend
hasn’t been cut, that’s going to increase the yield but it could be a dangerous assumption. First, if the company is in too much trouble,
it might cut that dividend to conserve cash. Just as importantly though, what good is it
to collect that hefty dividend if you lose double that on the stock price? So dividend yield is important but it’s
not the only thing you should be looking at. That’s going to be big in the five dividend
investing strategies we’ll talk about now. First though, if you’re likin’ the video
and think the information is helpful, do me a favor and tap that thumbs up button below
and let me know in the comments. Now a good dividend yield is what you can
get while still getting some upside return on the stock price. We talked about this idea in our dividend
payout ratio video. A company can return all its cash to investors
through a dividend but there’ll be no money left for growth and it may even lose competitive
share, causing the stock to fall. That means, when I’m looking at dividend
yield and the payout ratio, I’m looking for companies with a commitment to return
cash but also to grow the company. That generally means a good dividend yield
between 3% to 6% for regular stock companies. Since the dividend yield on the market, the
S&P 500 is just under 2%, companies in this three to six percent range are well above
the average and demonstrate that yield commitment. Now I know that a lot of investors want to
go for the highest dividend they can get, investing in stocks with double-digit yields
and if the stock price doesn’t fall then that’s not a bad return. A lot of times though, weakness on the share
price and volatility just isn’t worth that marginally higher dividend. Let’s look at those five dividend investing
strategies though because a few of them will really help you get those higher yields with
some solid price returns as well. One of the most popular dividend strategies
is investing in monthly payers. We’ve seen that most dividend stocks pay
out just four times a year. That can make it difficult to plan for paying
expenses if you’re living off your dividends or just as a passive income stream. That’s where monthly dividend stocks come
in, companies with a policy and a history of returning cash to investors every single
month. Even better, these stocks have a median yield
over 8% annually, that’s over four-times the dividend yield of the broader market. These are some great opportunities to create
that monthly cash flow that’s either going to grow your portfolio or give you that extra
cash each month to pay the bills. Now I am going to warn you, these monthly
payers tend to be in just a few business types. We see here that about 40% of monthly payers
are real estate investment trusts, another 38% are business development companies and
then some energy companies, usually master limited partnerships. We also see the average dividend yield in
each group so 7.4% on MLPs, 7.5% on REITs in the space and a whopping 10.1% average
yield on BDCs. There’s a reason for this we’ll talk about
and why these cannot be your only investment in dividend stocks. Again, do not think you can put together a
portfolio of just these monthly dividend stocks because it’s going to put your money at
risk. We see in that graphic, putting all your money
here is going to grossly expose you to just a few business structures. These companies set up as BDCs, REITs or MLPs
get special tax breaks but have to pay out almost all their earnings as dividends. That means they tend to have volatile share
prices, they have to raise money regularly through debt or equity and they are highly
exposed to rising interest rates. These monthly payers also tend to be much
smaller companies than other stocks. For example, of the 28 legit monthly payers
I follow, the average size is just $723 million with the largest only a $20 billion company. That might seem like a lot but it’s miniscule
next to a trillion dollar company like Amazon or Apple and none of the S&P 500 companies
pay monthly dividends. The fact that they are smaller companies with
less financial flexibility means you need to stay up on all the usual warning signs
for dividend stocks. These include sales growth, debt leverage
and some other signs you need to watch. You also need to understand the management
structure in those business development companies, the BDCs. It’s either going to be external or internal
management which is going to make a big difference on their compensation. External management is usually compensated
by growth in the company’s invested assets, so they want to make as many investments as
possible even if they aren’t necessarily great investments. Internal management compensation is tied more
directly with investor returns. Finding these monthly dividend stocks is pretty
easy with any stock screener or a Google search on monthly payers. What I want you to consider when you’re
using this strategy are just a couple of points. First is to make sure you spread your dividend
portfolio across different sectors and business types. That probably means only having a chunk of
your dividend investments in these monthly payers since they’re mostly those REITs,
MLPs and Business Development Corporations. Second is to pay attention to the share price
over the last few years as well. Don’t get caught up in that high dividend
yield because you don’t want it at the expense of a falling stock price. We’ve got a complete video on the channel
about investing in monthly dividend stocks so I’ll leave a link to that in the video
description below. One dividend strategy we haven’t talked
about on the channel but actually has a lot of research to support it is the Dividend
Aristocrats. Dividend Aristocrats is the name given to
companies in the S&P 500 index, so we’re talking companies of about $5 billion or larger,
that have increased their dividend payment for at least 25 consecutive years. Nearly three decades of increasing dividends
is a huge commitment, especially considering that includes the 2008 recession which was
the worst in 80 years. Stocks that increase their dividends have
been shown to outperform the rest of the market and these Aristocrats are a great way to play
on that. That list peaked at 64 stocks in 2001 but
has since fallen to just 57 companies that meet the filter. Over the decade to March 2019, the Aristocrats
have returned an annual 17.6% versus a 15.9% return on the broader S&P 500 market index. Not only has it outperformed the market but
the Aristocrats index has also done it with less volatility, so fewer violent ups-and-downs
in the prices. Now instead of trying to keep track of all
57 companies in the Dividend Aristocrats list, there are funds like the Proshares ETF, ticker
NOBL, that will do it for you. The fund holds all stocks in the Aristocrats
index and has a 2.3% dividend yield. What I want you to notice though if you’re
going to invest in the fund or the Aristocrats stocks, is this fund sectors and their weighting. Most of the fund is in just a few sectors
like consumer staples, industrials and financials. That’s obviously a function of how safe
the sectors are for cash flow and how the companies have been able to keep increasing
their dividends year-over-year but you might want to pair this fund with another that has
maybe a growth stock perspective. The reason here is that way you get more from
sectors like tech, consumer discretionary and others to balance out the heavy weighting
in just these three sectors in the Aristocrats fund. Another strategy, actually my favorite dividend
yield strategy, is investing in real estate investment trusts, REITs, and master limited
partnerships, MLPs. Like we saw in that previous strategy, these
are special types of companies that get tax breaks for returning most of their cash flow
to investors. Not all of them are monthly payers though
and I think some of the best picks are actually those normal quarterly-paying stocks. So REITs or real estate investment trusts,
are companies that own and manage property, usually commercial real estate property. The company pays expenses then passes through
at least 90% of the earnings to investors in the form of dividends. Investing in REITs, it’s important to spread
your investment across companies with different property types like office, warehouse, hotel,
data centers, retail, industrial and self-storage. MLPs or master limited partnerships own mostly
pipelines that transport oil and natural gas and then the storage facilities. They collect a fee from other energy companies
for using the assets and pass most of their earnings on to investors. Since much of their fee is based on the amount
that goes through those pipelines or is stored in tanks, they aren’t quite as depending
on energy prices so it can be a great way to lower the risk of weak oil or gas pricing
in your investments. With REITs and MLPs, I want to cover two very
important points to help you when you’re looking for these stocks. First is that taxes on the investments are
handled very differently. Taxes on dividends from REITs are like any
other dividend stock. If you hold the shares for more than 60 days
around that dividend payment, you pay a lower qualified dividend tax rate and you pay those
taxes each year on the dividends you collect. One of the best pieces of advice I can offer
with dividend investing is to hold these high-yield stocks in a retirement account, either an
IRA or a Roth IRA. That’s going to save you from having to
pay those taxes each year on the dividends and will seriously boost your returns. MLPs, master limited partnerships, are taxed
entirely differently. For each MLP company you own, you’ll get
a special tax form each year called a K-1 form. This is going to break out the dividend between
a return of capital and a normal dividend portion. Now that return of capital portion of the
dividend, and this usually ends up being the majority of the dividend, isn’t taxed each
year. It actually goes to lowering the taxable price
you paid for the shares so you don’t get taxed on it until you sell your shares. It’s a huge tax break, shielding you from
that annual tax hit on the full dividend but it also means you don’t want to hold these
in a retirement account. Hold these MLP investments in a regular taxable
investing account so you take advantage of that tax-deferred benefit. The second point I want to cover for REITs
and MLPs, and this is the biggest mistake I see investors make on the two investments,
is that you can’t use a lot of traditional value measures. These companies own assets like real estate
and pipelines that mean a huge amount of depreciation on the income statement. They take that depreciation off their earnings
to lower taxes but it also means that earnings are a terrible view of profitability for the
business. So if you ever hear anyone talking about the
price-to-earnings ratio of an MLP or a REIT, they don’t know what they’re talking about. You can’t use the P/E ratio with these stocks. There is a special way to value each of these
types of stocks and I’ll show you how to do that for each. What we’re going to use for MLP stocks is
use what’s called price-to-distributable cash flow or price-to-DCF. Finding this value for distributable cash
flow, the amount of money the company has available to return to investors, is important
also because it gives us an idea of sustainability. A company can’t pay out more than is available
forever so it’s a good metric to make sure that dividend isn’t going to be cut any
time soon. I’ll show you how to calculate DCF yourself
but all MLPs will calculate it on their reporting. I do it myself only because I like to double-check
the numbers coming out of the company and make sure I’m comparing stocks with the
same calculation. Here’s the table, and again don’t get
freaked out because this is always provided to you in reporting. To find how much money the company has available
to distribute, you take the cash flow from operations, this is all going to be found
on the Statement of Cash Flows, and you remove any spending on capital and income from non-controlling
interests. That gives you sustainable DCF which is what
the company can return to investors and still keep operations running smoothly. While sustainable DCF is a better measure,
most people use the DCF as reported because it’s sometimes the only number reported. To get to DCF, you also add back that income
from non-controlling interests as well as working capital reported. The big one here is adding back this proceeds
from asset sales. This is technically proceeds the company can
return to investors, a company can’t forever be selling its assets and still keep business
running so that’s why we use that sustainable DCF if it’s available. With this number, you can find that valuation
with the price-to-DCF or you can find how much the company is returning to investors
for what’s called the distribution coverage ratio. This is how much DCF the company earns versus
how much it pays out. Just like with MLPs, you can’t rely on reported
earnings for a REIT because of that high amount of depreciation they get from real estate. Instead, we use a measure called Funds from
Operations or FFO. FFO is very similar to that DCF we saw with
MLPs. You take the reported net income of the REIT
and add back depreciation but minus out any gains they made on property sales. Those property sales are a source of income
but not something the REIT can do forever and expect to stay in business. Remember, the idea is to find how much cash
the company has available to distribute without cutting into money it needs to run the business. Again, like the DCF calculation for MLPs,
you don’t necessarily have to do this yourself because it’s always reported by the company. It’s just a good idea to understand the
concept and be able to double-check the company’s reporting. You use FFO just like our other metric so
you can take the price of the REIT over FFO to compare the valuation to other REITs. You can also get a coverage ratio of FFO over
the dividend to see how safe the yield is for the stock. We’ve also got a video on the channel that
goes into more detail on investing in these REITs and MLPs so I’ll leave a link in the
video description to that as well. We’re about half way through out 2019 Dividend
Stock Challenge portfolio and the stocks are blowing up. The portfolio is up over 24% so far and beating
the market by nearly ten percent. I’ll leave a card here in the corner and
a link in the description as well to see how we picked dividend stocks for the portfolio
and how you can join the challenge. We’re here Mondays, Wednesdays and Fridays
with the best videos on beating debt, making more money and making your money work for
you. If you’ve got a question about money, just
subscribe to the channel and ask it in the comments and we’ll answer it in a video.

25 thoughts on “What is Dividend Yield? | Investing 101

  1. You asked for it❗ I'm ranking the five highest dividend stocks by total return and how to pick high yield stocks 😲 Must-Watch for dividend investors –> https://youtu.be/uf5SZuLIwC8

  2. Thanks for a clear overview of dividend payers and the key differences of pass-thru entities, like REITs & MLPs. The examples of computing DCF & FFO were helpful. Just a clarification: Are REIT dividends qualified or unqualified, meaning they are taxed at regular tax rate rather than dividend rate? What additional insight does AFFO provide?

  3. Nice video Jospeh! Way to keep it simple and straight forward 👌🏽This is one of those topics everyone needs to just pause their life for a few minutes and try to understand.

  4. Sphd is an ETF that pays monthly dividends and has low volitility and highest dividends in the s&p

  5. Hello Joe, thank you for this very interesting video about dividend investing.
    I have a question about the balance between investing and saving money. Currently I am focusing most of my money in my dividend growth investing strategy, so I don´t want to sell my dividend stocks at any point (if everything goes well). On the other hand, I want to buy a house in the coming years and I don´t want to take up massive debt for this.
    Any advise or tips to get a good balance between investing for the long run and saving up for a big purchase at the same time?
    Thank you in advance!
    Best regards,
    Tobias

  6. Joe, Alex here from San Diego California, I am new and interested in all this investing thing. Is there a video or book that you have or have written that you recommend to start off on the right path? Hope to hear from you soon. Thanks in advance.

  7. If I take 2.92 and divide it by the open (209.88) or previous close (200.67) I still don't get the 1.54% Forward DY. So, there must be something more to how Yahoo calculates this number.

  8. Learn something from you with every video, today it was looking at Funds for Operations for REITs.

  9. Joseph the K-1 forms from the brokerage firm comes late in the tax season.I didn't receive the K-1 form until the middle of March.

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