Dividends: How are they calculated?
Dividends are like an interest rate on a bank account. You invest in your favorite company and they make better products and offer better services. The company earns more money and pay a part of it back to its investors. It is as simple as that.
Dividends are usually shown as a percentage and calculated by dividing the cash value of dividends paid per share in a particular year by the stock price of one share.
Dividend yield is equal to the total annual dividend per share divided by the stock’s price per share. So if a company’s annual dividend is CHF 1.50 and the stock trades at CHF 25, the dividend yield is 6% (CHF 1.50 ÷ CHF 25).
Yields for a current year are usually estimated using last year’s annual dividend or multiplying the latest quarterly dividend by 4 and then dividing that by the current share price.
Dividends are not guaranteed. Companies certainly make an effort to keep paying common stock dividends. Most companies are very reluctant to cut dividends. However, companies can and do cut dividends, including companies with long track records of paying them.
2 questions to ask before buying a high-dividend stock:
Has the share price fallen? Why?
Can the company afford to pay its dividends (see market capitalization)?