Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 229

Dividend Yield - This value equals the annual dividends per share divided by the stock price expressed in percentage terms. In other words, it indicates the percentage payout per each dollar invested. The dividend yield is not unlike the yield paid by banks on savings accounts or CDs (Certificates of Deposit). The difference, however, is that the dividend yield varies with the amount of the dividend payout and the stock price, and therefore it is always in a state of flux.

Let's look at an example: Norfolk Southern (the railroad transportation company) pays an annual dividend of $0.80 per share. At the stock price of $25 per share, its dividend yield works out to 3.2%. This is of course much better than most savings accounts pay these days, but the risk is that the stock price could drop after an investment has been made, causing the investor to take a loss if he decides to sell the shares. And the investor would be doubly unhappy, because if he had waited to buy the stock at a lower price, his effective yield would have been higher. For example, at $20 dollars per share the yield would be 4%. Now if he decides to keep the shares and the company does not change its dividend payout, he will continue to collect $0.80 per each share owned and based on the original investment he is still making 3.2% regardless of the stock price. If the stock price moves up, he can sell the stock and collect the profit, or he can keep the stock and continue to collect the 3.2% on his original investment knowing that he locked in at a better yield.

Conservative investors usually buy and hold stocks with high dividend yields, which can provide a nice source of income. The drawback for a high yield stock is that the company is spending a lot of its earnings on its shareholders rather than using it for business expansion, which could translate into a stagnating stock price. Also there are no guarantees that the dividend amount would stay the same. Companies change their dividend policies all the time. Many investors

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Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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