What's a "good" dividend yield? You need a second number
Ask "is this a good dividend yield?" and you've already asked half a question. Yield on its own is a ratio — annual dividend ÷ price — and a ratio can move for two very different reasons: the dividend went up, or the price went down . A crashing price inflates the yield and makes a deteriorating company look like a bargain. To read a dividend you need a second number: the payout ratio — dividend…
When considering a dividend yield, it's essential to look beyond just the percentage figure. The yield alone does not tell the whole story, as it can be influenced by either an increased dividend or a declining share price. To gain a fuller understanding, you need to examine another metric: the payout ratio, which is calculated as the dividend divided by earnings.
This second number serves as a sustainability check for the dividend. Utilizing a dividend yield calculator and a payout ratio calculator together provides a comprehensive picture of a company's dividend. Both of these tools are built on the open-source dividend-math library, which contains two functions: dividendYield and payoutRatio.
By using the dividendYield function, you can determine the cash flow per dollar invested, while the payoutRatio function reveals whether that cash flow is affordable in relation to the company's earnings. A dividend yield by itself is insufficient to fully assess a company's dividend. For instance, a 7% yield paired with a 95% payout ratio indicates that the dividend consumes nearly all of the company's earnings, leaving little room for growth or resilience against earnings declines.
Conversely, a 3.5% yield with a 40% payout ratio suggests a more sustainable dividend, with ample headroom for increases and protection against adverse circumstances. The payout ratio acts as a lie detector, revealing whether the dividend is truly sustainable. Generally, a good yield for long-term holding should fall between 3-5%, accompanied by a healthy payout ratio, indicating a sustainable and potentially growing dividend, rather than an excessively high yield that may be propped up by an unsustainable payout or a falling share price.
Written by urgent.news from Dev.to's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
