Page 191

per share per quarter) and let’s say a current price of $50 per share, its yield would work out to be:

2 / 50 x 100% = 4%

This is not a bad return, given that many savings accounts barely surpass 3% interest rates. But remember that with savings account your money is FDIC insured. Of course, the yield amount changes as the stock prices moves daily, so sometimes the average stock price over a period of time (e.g., a month) is used to arrive at the average yield.

Many investors use dividends as a criteria to invest in a stock. For example, as prices of many tobacco companies (e.g., RJ Reynolds, Philip Morris) have come under pressure due to various smoking lawsuits, their dividend yields (which move in the opposite direction of the stock prices) have gone up. This has created a buying opportunity for the dividend players, who can earn a sizeable income from the dividends of such stocks. Bear in mind, however, that a company may at any time change its dividend policy, although some avoid lowering it as it is bad publicity. As mentioned before, in today’s market dividends have lost a great deal of significance. Nowadays many people do not even bother checking for dividend payments when they invest in stocks. Their criteria for investment returns is the potential stock price appreciation.

Another type of dividend is stock dividend. Companies practicing this form of dividend payout distribute a fraction of a share for each share owned by the shareholders on record prior to or on the record date. For example, a 10% stock dividend means that the shareholders would receive 1 extra share of the stock for every 10 shares they own prior to the record date. The day after the record date, the stock prices are adjusted down based on the dividend amount (share prices are reduced by %9.09) so the market value of the investors’ shares remains …