Investing News

## Dividend Rate vs. Dividend Yield: An Overview

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 include Apple, Coca-Cola, ExxonMobil, Verizon, Pfizer, and McDonald’s.

A dividend is the total income an investor receives from a stock or another dividend-yielding asset during the fiscal year. The dividend is also known as the dividend rate. Stock dividends can also be quoted using the dividend yield. While the dividend rate is expressed as a dollar figure, the dividend yield is presented as a percentage.

### Key Takeaways

• 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.

## 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 from 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 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 or 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.

## 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 if 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 a bad thing if it only occurs 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.