Experiences from an Entrepreneur

It’s not particularly difficult to understand the fundamentals of the stock market. It’s not like rocket science or brain surgery for example. But there are various factors that can drive the price of a stock up or down. Understanding those factors is what separates the winners from the losers in stock market investors. You might very well think you understand the fundamentals, but unless you get a handle on the nuances of a particular stock’s price, you could be on a losing path.

One of the nuances that you should certainly get to grips with is how the dividend yield can affect the value of a company and the price of its stock. Many people buy shares in companies purely for the “passive income” they hope to gain from the regular company dividends. The idea is buy some shares, sit back and wait for the monthly checks to roll in. Which is all very well if that company does deliver predictable dividends. But not all companies do pay dividends and even those that do, only pay them when they continue to make profits above a certain amount.

However, if you find suitable companies to invest in, then dividends can give you a nice passive income. The dividend yield of a company is the percentage of their profits they pay out to shareholders.

So how is dividend yield actually calculated? It’s actually very simple. The dividend yield of a company is the share price divided by the annual dividends per share. Like I said, not rocket science!

Because it’s a very simple calculation, it’s easy enough to do the math yourself in your head when looking at share prices and annual dividends. Of course, many price services show you the dividend yield of a stock anyway, so you don’t actually have to do the calculation yourself.

In conclusion, if you are looking for a passive income from the stock market, then you want to find stocks that deliver a high dividend yield. Of course past performance is no guarantee of future income, so beware of dividend yield that seem too good to be true, because they probably are!

For more information, visit Voices in Finance