Part I of Dividends: A Powerful Ally

Part II:

Putting the dividend amount into a percentage can help us compare stocks to one another.  The annual dividend divided by the stock price represents the dividend yield (as of 4/16/13 Well’s dividend yield was 2.7%). In contrast, J.P. MorganChase (JPM) has a dividend yield of 3.13% and Citi (C) has a yield of 0.9%.  The dividend yield, like the PE Ratio, allows us to identify who is paying its shareholders more to own that stock.

 

moneyAnother way to use the dividend yield is by looking at a company’s yield relative to their historical yield can also be helpful.  A historically high (low) dividend yield may signal an attractive (unattractive) investment opportunity because the stock price is depressed (elevated) and dividends are making up a larger (smaller) percentage of the price.  However, a very high dividend yield can be a sign that a company is struggling (investors have been selling the stock).  It is not uncommon for these very high yielding stocks to cut their dividend!

 

Despite being a less flashy dividend’s impact on a portfolio’s total return should not be underestimated: the Wall Street Journal estimates that since 1982 dividend paying stocks have had annual returns of 8.92% vs. 1.83% for non-dividend payers!  Vanguard’s founder John Bogle completed a study where he found that if you invested $10,000 in the S&P Index in 1926 and reinvested those dividends that your initial investment would have been worth $33,100,000 in 2007!

 

Like the P/E Ratio the dividend yield comparisons need to be part of a more complex and comprehensive review of a company.  It is never a good idea to rely on a single data point when making an investment decision!

 

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