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There are many advantages of investing in stocks that pay dividends. They can offer a solid source of income for investors looking to supplement their earnings. In addition, an investment like this can often provide a secure place to earn capital gains. The opportunity to earn income and increase net worth make dividend stocks a wise investment choice.

While this type of investment can provide multiple opportunities to increase net worth and cash flow, there are some risks investors should consider. Chasing the highest yielding stocks, for example, is thought of a very risky strategy. One way to minimize the investment risk is to leverage many of the ratios and financial calculations for a particular stock.

For dividend investors, calculating the current yield of a company is an important piece of data that can give investors important details. These details and calculations can be used to make sound investment choices.

Current Dividend Yield Calculation

Calculating a stocks current dividend yield is a very simple equation. Most financial websites or online stock brokers already publish this up to date information for stocks that pay dividends. Even though dividend yields are easy to find, it is important for investors to learn where this calculation is derived from. Understanding how the yield is calculated can help investors see the overall health of the company.

Investors can use the following equation to calculate a company’s current yield.

Current Dividend Yield = Annual Dividend / Current Share Price

The current yield on a stock that pays dividends is calculated by dividing the annual dividend of a company by its current share price. The annual dividend would equal the total dividend payout to shareholders for the past 12 months. It will normally exclude special one time payouts that do not follow the normal dividend calendar of the company.

The calculation above also uses the current share price of the stock. While this information can be accessed easily, the share price of a stock can fluctuate considerably throughout the course of a day, week, month, or year. Investors running this calculation need to understand that a fluctuating share price can change the dividend yield calculation constantly.

Dividend Yield Example

Calculating a stocks dividend yield can take as little as a few minutes to run the equation. An investor will need to find a few pieces of data related to the stock. The annual dividend can be found on any financial website or through an online discount broker. The company’s website would also provide this important information to shareholders. In addition to the annual dividend, the current share price can be found in the same general locations.

Looking at an example, let us calculate the dividend yield of a fictitious company. Company XYZ is currently trading at $50 per share. Over the past 12 months, the company has paid out $1.00 in dividends per share. Using the equation above, the dividend yield would look like this -

2% = ( $1 / $50)

Let us say the stock market has a major correction, and the stock price of company XYZ drops to $40 per share a week later. The new current yield would look like this -

2.5% = ( $1 / $40)

As displayed above, the current share price of a stock can drastically change the yield of stocks that pay dividends in very little time. Smart dividend growth investors use this and other equations to make decisions on when to buy a stock. A market correction may be the best time to start buying a healthy dividend paying stock.

Using Dividend Yield to Make Investment Decisions

The current dividend yield is one of the most widely leveraged pieces of financial data used by income investors. An increase in a stocks yield can signal potential purchase points on the best stocks that pay dividends. At the same time, an increase in a poorly run company’s yield may trigger a sell order for some investors. Depending on the circumstances, the dividend yield can signal many different things to investors.

Leveraging the dividend yield of a company is a critical part of researching stocks that pay dividends. Combining this calculation, along with several other factors and criteria can help investors minimize their investment risks while working to maximizing their gains. Regardless the type of investor, the dividend yield is an important ratio and tool that can help shape a solid investment strategy.

To find out more information on how to use current yield information to purchase stocks that pay dividends, as well as other FREE information, visit BuyStocksOnlineInfo.com today. Article Source: http://EzineArticles.com/?expert=Robert_J._Tyler

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