Bothdividend yieldandtotal returnare terms used to describe the performance of a stock over a certain time period (usually one year), but they reflect different types of performance. Whether equity investors should focus on income generation, which includes dividend yield, or return is a contested topic in the financial world. In truth, the relative importance of each measurement likely depends on your individual circ*mstances and investment horizon. This does not mean you have to neglect one in favor of the other; it is wiser to consider both before selecting an investment.
The Importance of DividendYield
Dividendsare the portion of a company's profits that are distributed to shareholders. It is considered a sign of clear financial health and confidence for a company to pay out dividends, which are usually independent of the share price. The dividend yield is afinancial ratiothat represents the dividend income per share, divided by the price per share. For example, a stock priced at $100 per share that receives a dividend payment of $8 is said to have a yield of 8%.
For long-term investors, dividends can be very powerful, because they can be reinvested and used to purchase more shares, meaning the investor does not have to commit more of his or her resources to increase his or her equity holdings. Other investors rely on yields to produce a stream of income from their investments. Though not quite as reliable as fixed-income investments such as bonds, dividend-producing stocks can be quite valuable in this way.
Yield, however, can be misleading. Some companies continue to pay yields even when they are operating at a short-term loss, while other companies pay out yields too aggressively and fail to reinvest enough profit to sustain operations down the road.
The Importance of TotalReturn
Totalreturn, often referred to as "return," is a very straightforward representation of how much an investment has made for the shareholder. While the dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends, and increases in share price, among other capital gains.
Investors can also look at thedividend-adjusted return, which is part of the total return. This figure includes the stock's price appreciation and paid dividends. To determine if a trade turned a true profit, the investor will also need to consider capital gains and dividend income taxes in the dividend-adjusted return.
On the surface, this appears to provide a more encompassing, and therefore useful, performance metric than the dividend yield. However, a return is entirely retrospective, and share prices can increase for a huge number of reasons. It is typically more difficult to project future investment performance from the stock's return than from its dividend yield.
Which Is More Important?
The importance is relative and specific to each investor. If you only care about identifying which stocks have performed better over a period of time, the total return is more important than the dividend yield. If you are relying on your investments to provide consistent income, the dividend yield is more important. If you have a long-term investment horizon and plan on holding a portfolio for a long time, it makes more sense to focus on total return. However, the evaluation of a company for potential equity investment should never come down to just these two figures; rather, look at the company's balance sheet and income statement, and perform additional research as well.
FAQs
If you are relying on your investments to provide consistent income, the dividend yield is more important. If you have a long-term investment horizon and plan on holding a portfolio for a long time, it makes more sense to focus on total return.
What is more important, dividend or yield? ›
While the dividend rate indicates total expected income, the dividend yield provides more information on the rate of return and can be useful in comparing different income-paying assets. Apple, Investor Relations.
What is the difference between total return and dividend yield? ›
Yield represents the earnings generated by an investment over a specific period, typically expressed as a percentage. Return, on the other hand, indicates the overall profit or loss of an investment over time, measured by the change in its dollar value. Yield is prospective, while return is retrospective in nature.
What is a good dividend yield for a stock? ›
What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment.
What is the difference between ROI and dividends? ›
Dividend yield and return on investment (ROI) are two important concepts that every investor should be familiar with. Dividend yield measures the percentage return an investor receives in the form of dividends, while ROI calculates the overall profitability of an investment.
What is the difference between dividend yield and return? ›
Total return, often referred to as "return," is a very straightforward representation of how much an investment has made for the shareholder. While the dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends, and increases in share price, among other capital gains.
Is yield better than return? ›
Rate of return can be applied to nearly any investment while yield is somewhat more limited because not all investments produce interest or dividends. Mutual funds, stocks, and bonds are three common types of securities that have both rates of return and yields.
Which stock gives the highest dividend in the world? ›
World's companies with the highest dividend yields
| Symbol | Exchange | Div yield % TTM |
|---|
| ORIENT D | DFM | 78.74% |
| FORTISMLR D | BSE | 75.24% |
| SSPRG D | TASE | 69.29% |
| BXE D | SGX | 9.44% |
27 more rowsOn its own the dividend income from an investment can deliver a handsome long-term total return. But if you combine the income with a bit of growth, the impact of compounding is even more profound.
What are the best dividend stocks to buy and hold forever? ›
3 Magnificent Dividend Stocks With Yields Above 5% to Buy Now and Hold Forever
10 Best Dividend Stocks to Buy
- Verizon Communications VZ.
- Chevron CVX.
- Comcast CMCSA.
- Medtronic MDT.
- Dow DOW.
- LyondellBasell Industries LYB.
- Devon Energy DVN.
- Hershey HSY.
Here Is a List of the Top 5 High-Yield Stocks
- International Seaways Inc (INSW)
- Dow Inc. (DOW)
- UnitedHealth Group Incorporated (UNH)
- Broadcom Inc. (AVGO)
- Chevron Corporation (CVX)
What is your risk tolerance? If you're more risk-averse, reinvesting dividends might be preferable since this strategy tends to be more stable and offers (some) predictability. If you are willing to trade having more risk for the possibility of higher returns, investing in growth funds will be more appealing.
How important is dividend yield? ›
Therefore, a stable or growing dividend yield can be a signal that a company is in good financial standing. Regular dividend payments can also boost shareholder confidence, signaling that management is confident in the company's future prospects and earnings potential.
What investment pays higher than average dividends? ›
Investors seeking predictable income may turn to stocks that pay dividends. Stocks that pay a higher-than-average dividend are called "income stocks."
Is high yield better than high dividend? ›
Investors often face a choice between Dividend Growth stocks and High Yield stocks when seeking income-generating investments. While High Yield stocks offer attractive immediate returns, Dividend Growth stocks provide superior long-term benefits, including income growth, capital appreciation, and lower volatility.
What is a good dividend payout ratio? ›
So, what counts as a “good” dividend payout ratio? Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.
Should yield on cost be higher than dividend yield? ›
Since most securities rise in value over time, the yield on cost is often, but not necessarily, higher than the current dividend yield.
Are dividend stocks good for retirement? ›
You could see some high returns, and if you stash dividend stocks in a taxable account, you can minimize the taxes you pay on them.
