Why do dividend yields rise when stock prices fall? It's because of a little simple math. Imagine the dividend yield as the fraction it is -- the dollar amount of the annual dividend on top (the numerator) and the current share price on the bottom (the denominator).
As some examples, here are a few well-known stocks, along with their recent dividends and yields:
Let's say the Light Saber Defense Systems Co. (ticker: ZHOOM) pays out $3 per year in dividends and trades today at $100 per share. The yield is 3% (3 divided by 100 equals 0.03, or 3%). Drop the share price to $75 and the yield jumps to 4% (3 divided by 75 equals 0.04, or 4%). Raise the share price to $120, and the yield falls to 2.5%. Voila!
3/100 = 0.03 = 3%
3/75 = 0.04 = 4%
3/120 = 0.025 = 2.5%
Notice what happens if we keep the stock price steady at $100 per share and change the annual dividend amount from $2 to $3, and then to $4:
2/100 = 2%
3/100 = 3%
4/100 = 4%
The higher the dividend dollar amount in relation to the stock price, the higher the dividend yield, and vice versa. The higher the stock price in relation to the dividend dollar amount, the lower the dividend yield, and vice versa.
One way to take advantage of the power of dividends is through "Drips" (direct investing plans, or dividend reinvestment plans). Learn more in these articles:
By the way, if you're interested in finding some strong, growing companies with significant dividend yields, I invite you to take advantage of a free trial of our Motley Fool Income Investor newsletter, which will permit you to peek at a long list of dividend payers recommended by Fool analyst Mathew Emmert.
Learn more in these Mathew Emmert articles:
- How to Achieve 20% Yields
- Extra Dividends, Extra Growth
- Beat the Market With Less Risk
- How to Be a Dividend Investor
Pfizer is a Motley Fool Inside Value recommendation. Southern is a Motley Fool Income Investor recommendation.