Proprietary Data Insights
Top Dividend Stock Searches This Month
Last month as part of our series on retirement planning, we discussed the prospects of living off of dividend yield in retirement. This yield is the income your dividend stocks generate regularly.
In today’s Juice, we take it a step further, focusing less on retirement and living off of dividend yield and more on what that dividend yield means for your stock picking.
What Is Dividend Yield?
Dividend yield shows how much a company pays out in dividends relative to its stock price (dividend divided by stock price, multiplied by 100 to get a percentage).
For example, if a stock trades for $50 and pays a $2 annual dividend, its dividend yield is 4%.
In a moment, we’ll give specific examples showing that:
Making Sense of Dividend Yield
When we ask our proprietary sentiment indicator, Trackstar, to spit out the dividend stocks investors search for most, Apple (AAPL) almost always tops the list.
Apple currently pays an annual dividend of $0.92. It’s increased its dividend payment every year for the last 11 years. Expect the company to announce another increase with earnings in April.
At the same time, Apple yields about 0.59%. We made this calculation with the stock trading for $155.19. As Apple’s stock price fluctuates, so will its dividend yield. Holding the annual dividend constant, as the share price decreases, dividend yield increases. The inverse holds true.
AAPL at $100 per share results in a dividend yield of 0.92%.
AAPL at $200 per share results in a dividend yield of 0.46%.
Which scenario would you rather have as an investor? The answer is obvious and becomes even more so when you factor in dividend increases…
If Apple does what it did in 2022 and raises its dividend by 5%, the dividend will be $0.97 annually.
In this case, AAPL at $155.19 per share results in a dividend yield of 0.63%. That’s slightly higher because of the higher dividend and constant share price.
Factor in share price movement with the new dividend and it looks like this: AAPL at $100 per share results in a dividend yield of 0.97%. AAPL at $200 per share results in a dividend yield of 0.49%.
This shows not only how share price and annual dividend work in concert, but that, as an investor, you tend to be better off with a seemingly low yield as long as the stock price is rising. If the company also regularly raises its dividend, that’s icing on the cake. That’s part of what makes Apple such a great dividend growth stock.
On the flip side, there’s AT&T (T). A classic yield trap.
Over the last five years, AT&T shares have lost roughly 30% of their value. And during that time, the stock’s dividend yield was as high as 7.9%, but never lower than 4.0% and change. At $19.00 per share (an area where T has spent a fair bit of time in recent months), the stock yields roughly 5.8%.
On 100 shares of T – a $1,900 value – you’d get roughly $111 in annual dividend income, based on its $1.11 annual dividend.
Sounds incredible until you factor in what’s happened with the share price. If you bought T right before it cut its dividend in half in January 2022, you paid somewhere around $19.80 per share. With T at $19 per share, you’d have an on-paper loss of about $80 on 100 shares. While the $111 in dividend income more than offsets the drop in share price, this isn’t the case over a longer period.
Historically, the longer you stuck it out with AT&T, the less of a contribution the dividend made to your overall investment. Let’s say you bought T near the $30 top in late 2019. On 100 shares, you’d be down about $1,100 on your investment. You’d have collected roughly $579 in dividend income over this three-plus-year holding period. You’d have also endured the dividend cut from $2.08 annually to the current $1.11 yearly payout.
An on-paper loss of around $1,100 on the stock versus $579 in dividend income. Even if you reinvested that dividend income into new shares of T, you’re no better off. You reinvested into a sinking ship.
In this case, T’s perennial high dividend yield, in conjunction with its languishing at best and usually floundering stock price, was a red flag. The company’s shares have not only continued to underperform, but it cut its dividend.
The Bottom Line: This isn’t to say there’s never opportunity in underperforming stocks, even if the dividend yield is high. In 1, 2, 5, or 10 years, you might come out in excellent shape if you stayed the course with T. Only time will tell.
Our tutorial deals with history. But it also deals with anticipated future reality based on educated guesses.
Slow and steady wins the race. For every chance you take on an AT&T, there’s an Apple that runs the marathon like a champ, gives you stable growth and income over time, and, maybe most importantly, lets you sleep at night without constantly refreshing your long-term portfolio.
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