Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs the computations that make the biggest difference to your bottom line.
This week, our quest to make you smarter than a fifth-grader takes us from the daily pain of the annual percentage rate to the delightful den of the dividend yield.
The myth
First, the question that sparked this week's lesson:
When stocks pay a dividend, is it figured daily, monthly, quarterly, or annually? Is the same calculation used for each stock? What is the calculation?
Whoa! Easy, cowboy. That's a lot of questions. Let's tackle the first one, OK? I promise everything will be clear after we do.
Dividend yield can be confusing because it looks like the APR. Take a look at the yields offered by these excellent starter stocks:
|
Company |
Dividend Yield |
|---|---|
|
3M |
2.20% |
|
Avery Dennison |
2.50% |
|
Fifth Third Bancorp. |
4.10% |
|
M&T Bank |
2.10% |
|
McDonald's |
1.90% |
So, dividends are paid like interest, right? Right?!?
The math
Actually, no. Dividends are most often paid quarterly, but the yield represents the amount paid annually, divided by the current stock price. Here's the math:
Dividends paid over prior 12 months / current stock price
So, if you own stock in Acme Rockets (TICKER: BOOM), which trades for $50 a share and which paid you $0.25 a quarter over the last four quarters, you're earning a dividend yield of 2.00%. That's $1.00 / $50.00, which equals 0.02, or 2.00%.
Notice the difference? The cash balance you carry will only rarely impact what you earn in interest. Your dividend yield, however, will fluctuate daily as the share price of the stock you own rises and falls.
Questions? Submit them here. Otherwise, I'll see you next week when we dig into the mathanese of reinvested dividends and how they can affect your yield.
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Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on personal finance, Foolishness, and investing in general may be found in his blog. 3M is an Inside Value pick. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning mathanese.
