Dividend yield, or annual dividend yield, refers to the amount of money a stock pays out as dividends relative to its current share price, expressed as a percentage. Here's a formula and an example to help calculate the dividend yield of your stocks.

What is dividend yield?

Dividend yield can technically be calculated for any time period, but is almost always expressed as an annualized percentage. A stock's dividend yield is defined as the amount of money it pays its shareholders each year, as a percentage of its current stock price. Image source: Getty Images.

For example, if a stock's current share price is \$100 and it pays dividends at a \$5 annual rate, its dividend yield is currently 5%.

It's also worth noting that since stock prices change constantly, so does dividend yield. This is especially true with volatile stocks, where dividend yields can fluctuate considerably from one day to the next. This fact is the main reason it can be so useful to know how to calculate dividend yield. Many stock quotes only update their dividend yield calculation once per day, not continuously. By knowing how to calculate dividend yield on your own, you can get an instantaneous dividend yield for any stock, which can help you make better-informed investment decisions, particularly on days where stock prices experience big moves.

How to calculate dividend yield

If you know a stock's annual dividend, the calculation is simple. Just take the dividend amount, divide it by the stock's price, and then multiply by 100 to convert to a percentage. If you only know one of the stock's dividend payment amounts, it adds an extra step. For example, let's say that you know a stock pays a \$0.50 dividend and that it makes payments quarterly. In this case, you need to annualize the dividend by multiplying by the number of dividend payments per year. This is four for quarterly paying stocks and 12 for monthly dividend payers. In this case, the formula can be modified as follows: An example

Let's look at a real-world example to illustrate this. Let's say that I'm thinking of adding to my position in AT&T and I want to calculate the instantaneous dividend yield to help me make my decision.

AT&T pays a quarterly dividend of \$0.48 per share, and at the moment I type this sentence, the stock is trading for \$38.87 per share. Using my dividend yield formula, I can calculate AT&T's dividend yield as: If my strategy is to only buy AT&T shares when they are yielding, say, 5% or more, this could be a big factor in my decision.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!