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source: La Presse
author: Martin Vallières
translation: BingTranslate/doxa-louise
Demystifying the economy
How is the dividend yield of shares calculated on the stock market?
Essentially, the current dividend rate of return on a share is obtained by dividing the total and annual amount of the dividend by the current price of the share on the stock market, explains Desjardins Online Brokerage on its web portal.
Every Saturday, one of our journalists answers, accompanied by experts, one of your questions about the economy, finance, markets, etc.
I would like to know on what basis is the dividend rate of return per share calculated in the stock market information, day by day?
Before explaining the calculation of the dividend yield of shares on the stock market, it is first necessary to recall the origin of the dividend in the accounting and financial management of companies.
"A dividend is a cash portion of a company's profits that is distributed to shareholders," explains National Bank Direct Brokerage (NBDB) on its web portal.
"Generally, dividend shares are issued by mature companies with regular and reliable earnings. They can therefore pay part of it in the form of a dividend [to shareholders] while using the rest for other financial management purposes: debt repayment, share buyback, reinvestment in the company, etc."
That being said, how is the dividend yield of a listed stock calculated?
Essentially, the current dividend rate of return on a share is obtained by dividing the total and annual amount of the dividend by the current price of the share on the stock market, explains Desjardins Online Brokerage on its web portal.
"For example, a company whose share is listed at $100 and which pays a dividend totalling $6 per share offers a current return of 6% on its shares," explains Desjardins.
"As a stock's price rises or falls, its current dividend yield fluctuates in the opposite direction."
In addition, for the calculation of the dividend yield of shares already invested in a portfolio, it is the cost of acquiring these shares that must serve as the divisor number of the most recent total and annual amount of dividend paid.
This type of calculation can be useful to gauge the evolution of the dividend yield of the shares in the portfolio compared to the current rate of return of the same stocks, according to their price on the stock market.
Also, what is the purpose of dividend yield for equity investors?
Many investors view regular dividend payments as a form of rent income while waiting for the stock price to rise or, conversely, as a form of compensation while waiting for the stock price to recover from a bearish episode.
Excerpt from the NBDB web portal
"In an environment of equity markets with limited upside potential in the short term, and inflation still high, holding dividend stocks can be an excellent way to improve the current return on equity investments," says Hugo Ste-Marie, Director of Portfolio Strategy and Quantitative Analysis at Scotiabank World Markets in Montreal, in his recentOutlook 2023 report.
However, Ste-Marie warns, "simply buying stocks with above-average dividend yields is not an optimal investment strategy."
Why? "Because it doesn't always protect [the value of the stocks in the portfolio] in the event of a downturn in the business of the companies concerned, and an increased risk of a reduction in their dividends."
As an alternative, notes Hugo Ste-Marie, "market analysis shows that shares of companies accustomed to regular dividend increases perform better over time."
"These companies with a well-established dividend policy are often in low-risk, less cyclical industries. However, these characteristics become advantages in a context of increasing recession risk, while optimistic expectations of earnings or dividend per share growth may not materialize in more cyclical areas of the stock market. »
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