Understanding What are Dividends
Corporate board members and executives determine what portion of earnings they pay out to shareholders as dividends, as well as how much of the earnings should be reinvested in the company. Hewlett-Packard, the world’s biggest personal-computer maker, approves 10% increase in quarterly dividends while keeping research and development running for the company. Read more about it in this article from Bloomberg.
Dividend Yield - Definition and Formula
This criterion rates the quality of an investment in terms of investor’s income from distributed dividends. The overall yield of the investment is not taken into consideration since this criterion ignores the stock price and its changes throughout the investment period. The dividend yield refers to the ratio of the dividend to the current stock price.
For example, if the price of Merck (ticker: MRK) was $82.44 on January 19, 2001, and the dividends distributed over the past 12 months totaled $1.26 per share, then the dividend yield for Merck on that date was 1.53% ($1.26/$82.44=1.53%).