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dividend yield business definition

The annual dividends from a common or preferred stock divided by that stock's market price per share. If a common stock trades at a price of $50 per share, its $.92 dividend provides a dividend yield of ^$.92/_$50 , or 1.84%. This figure measures the current return on a particular stock but does not take into account potential gains and losses in the security's value.

I tend to favor stocks that have a high dividend yield. Is this a smart investment strategy?

There are many reasons, both good and bad, that a stock would have a high dividend yield. A company could be experiencing business problems causing the stock price to fall and the dividend yield to rise and a dividend cut to be in its future. I would be concerned if a company's dividend yield were out of line with that of other companies in its industry group. On the other hand, a high dividend yield could indicate a mature company with strong free cash flow and a strong balance sheet that is simply distributing profits to its shareholders. As long as you do your due diligence on the financial strength of the company, purchasing stocks with a high dividend yield can be a smart investment strategy.

Richard S. Campbell, CIMA^®, Senior Vice President, Wealth Management, Portfolio Management Director, Smith Barney, Valdosta, GA

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