In this series, we demystify investing terms for beginners.
Previously, we explored what a REIT means. Now, let’s find out what dividend yield is.
Dividend yield is a company’s annual dividend payment to shareholders expressed as a percentage of its share price. Investors use dividend yields to judge whether it’s worth investing in a particular stock.
For REITs, dividends are known as distributions, while dividend yield is called distribution yield.
Dividends are payments from a company’s profits distributed to its shareholders.
Annual dividend is the addition of all the dividend declared for the past 12 months. Some companies pay every quarter, some pay every half-yearly, while some only pay once at the end of their financial year.
The formula for dividend yield is:
Dividend yield = (annual dividend / stock price) * 100%
Let’s use the formula above on real companies.
CapitaLand Limited (SGX: C31), a blue-chip stock, declared a dividend of S$0.12 per share for 2018. It usually only pays dividend in the final quarter of the year.
So, at CapitaLand’s share price of S$3.86, its dividend yield equates to 3.1% ((S$0.12 / S$3.86) * 100%).
Whereas, CapitaLand Mall Trust (SGX: C38U), a REIT, pays distributions every three months (also known as a quarter). By adding up all the quarterly distributions for the past 12 months, one would arrive at S$0.1197 per share.
Therefore, at CapitaLand Mall Trust’s share price (technically known as unit price for REITs) of S$2.62, the distribution yield is 4.6% ((S$0.1197 / S$2.62) * 100%).
A company with a high dividend yield doesn’t necessarily mean it’s a good investment. Its dividend yield could be high as its stock price could have dropped suddenly due to poor business prospects.
When it comes to investing, the sustainability of the dividend yield is more important than the dividend yield itself.
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