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Dividend Yield - The Formula and How to Spot the Best Dividend Stocks - YouTube
Channel: The Motley Fool
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hey there I'm Dylan Lewis from The
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Motley Fool in this FAQ video we're
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gonna explain dividend yield how
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investors can use the dividend yield
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formula and at the end of the video
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we're gonna go through a nightmare
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scenario of how investors can be tricked
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by a high-yield stock dividend yield is
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a metric all dividend investors obsess
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over it refers to a stock's annual
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dividend payments to shareholders
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expressed as a percentage of the stock's
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current price now the actual formula is
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annual dividend payments divided by
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stock price for example as of taping
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Microsoft shares cost around one hundred
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and sixty-seven dollars and the company
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pays a quarterly dividend of 51 cents if
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the dividend stays exactly the same over
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the next 12 months
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investors will receive four dividend
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payments totaling two dollars and four
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cents dividing that payment total by the
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current share price you get a yield of
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around 1.2 percent another way of
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thinking about dividend yield is that
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one year from now if shares of Microsoft
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are exactly the same price they are now
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investors will have gained 1.2 percent
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thanks to the dividend payments now it's
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important to realize that a stock's
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dividend yield can change over time
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either in response to market
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fluctuations or as a result of the
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dividend increases or decreases by a
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company in the case of Microsoft for
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years investors enjoyed a yield of over
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2% on their shares but over the past two
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years the company's stock prices almost
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doubled thanks to its booming cloud
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business so even though the company has
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increased its dividend every year for
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the past couple years the yield is near
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ten-year lows because the share price
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has gone up faster than the dividend
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payments that's why it's important to
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understand the underlying equation for
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calculating yield and why it's important
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to consider yield and Total Return
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dividends are just one component of how
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investors can make money you should also
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look at this Total Return figure which
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takes dividend yield and includes
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increases or decreases in share price to
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for example if a stock's price goes up
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by five percent this year and it pays a
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three percent dividend yield then your
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total return is 8 percent in the case of
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Microsoft in the beginning of 2019 the
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yield was roughly 1.5 percent but over
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the course of the year shares went up 55
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percent giving investors that bought on
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January 1st 2019 around 56 percent
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returns pretty darn good
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with Microsoft yield went down because
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shares became more valuable the opposite
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can happen to a stock's dividend yield
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can go up dramatically because a
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company's share price Falls say shares
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of a stock go from $20 to $10 over the
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course of the year and its dividend a $1
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stays exactly the same the company's
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yield would go from 5% to 10% and it
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would seem like an awesome opportunity
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for investors that haven't been
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following the company closely if they're
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blinded by the yield they won't realize
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that it's only high because the business
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is struggling and if it continues to do
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poorly the company might cut its
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dividend entirely and investors could
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lose even more if the share price
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continues to fall due to bad business
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results that's why in addition to
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looking at yield you should look at the
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company overall here's a quick list of
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things to keep in mind do you understand
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the business
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can you explain what they do and how
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they make money if you can you'll be
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able to recognize and understand the
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business and how it's doing financially
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- is the company growing is the company
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posting revenue growth and is that
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growth generally in line with where it
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has been in the past the growing
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business is more likely to be a healthy
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business and 3 is the business relevant
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in its industry this is harder to
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measure but the idea here is that you
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generally want to own market-leading
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companies or companies poised to become
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market leaders if an old business is in
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the process of being disrupted it
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probably doesn't make for a great
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dividend stock one way to think about a
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lot of these factors and look at it in
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one digestible metric is to look at a
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company's payout ratio this measures how
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much a business pays in dividends
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relative to its net income the reason we
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look at this is that dividend payments
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are something a company elects to do and
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if they're struggling they might decide
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to cut their dividends there isn't a
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single right figure for the dividend
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payout ratio but the idea here is that
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you want to look at the number relative
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to where it has been in the past for the
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company and how the company compares to
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its peers if the ratio suddenly spikes
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unexpectedly that could be a sign that
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the company might have trouble
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maintaining its payments down the road
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unless it's able to bring in more money
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with its operations and if a stock's
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payout ratio is over a hundred percent
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it means the company is paying out more
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in dividends than it's making an income
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which is not sustainable over the long
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term for a full breakdown on dividend
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yield and payout ratio get our free
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dividend report over at fool.com slash
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pay me there's a link for that down in
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the description
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one last thing on dividend yields there
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are special structure businesses like
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real estate investment trusts and master
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limited partnerships that operate
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slightly differently than your average
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business they have higher yields because
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they're built to share more of their
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income with their shareholders now there
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are great reef and MLP investments out
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there but they require using industry
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specific metrics to evaluate well drop a
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link to our reef video in the comment
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section the point is investors looking
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at only yield might accidentally buy
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MLPs and REITs without realizing it and
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that could open them up to complex
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businesses and complicated tax
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structures that's why item number 1 on
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our checklist before was do you
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understand the business make sure you do
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your homework first
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and don't just scoop up shares of
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high-yield stocks okay that's going to
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do it for this FAQ video we want to know
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what you want us to cover next drop
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ideas down in the comment section below
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and if you can do a favor and hit the
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thumbs up button below to like the video
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tells YouTube that we're doing good
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stuff over here and it helps us reach
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more people we love doing that if you
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want our free diffident investing
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playbook head over to fool.com slash pay
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me it's got everything you need to get
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started and three starter stocks
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Microsoft is one of them you have to
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have the link to get the other two until
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next time thanks for watching and fool
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on
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