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.
Is dividend yield most important? ›
The dividend yield can play an important role in evaluating a stock's return on investment, but it shouldn't be the only factor you consider when choosing your investments.
What is more important dividend rate or yield? ›
Both metrics are important for equities investors. 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.
Which is better yield or 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. Consider a mutual fund, for example.
What is the difference between total return and dividend yield? ›
Total return refers to interest, capital gains, dividends, and distributions realized over a given period of time. Investors focused on yield are generally interested in income and less concerned with growth, such investments may include CDs and bonds.
Should I focus on dividends or growth? ›
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
What is the disadvantage of dividend yield? ›
The following are the disadvantages: In case the dividend data is old or is based on erroneous information, the evaluation of a stock based on this information is incorrect. Sometimes high yield can be misleading since it may indicate a falling stock price instead of an increase in dividend payment.
Does total return include dividend yield? ›
Total return includes price growth plus dividend and interest income. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.
What is the difference between yield and return? ›
Yield refers to income earned on an investment, while its return references what an investor gained or lost on that investment. Yield expresses itself as a percentage, while the return is a dollar amount. An investment's yield is a more forward-looking assessment.
What is too high of a dividend yield? ›
Very High. A payout ratio that is between 75% to 95% is considered very high. It implies that the company is bordering towards declaring almost all the money it makes as dividends. This increases the risk of the company cutting its dividends because our formula is forward looking.
In conclusion, yield and return are both powerful features in Python that serve different purposes. The yield statement is used to create generator functions that can produce a series of values lazily, while the return statement is used to exit a function and return a single value.
Why use yield vs return? ›
The yield function is used to convert a regular Python function into a generator. The return is used for signifying the end of the execution where it “returns” the result to the caller statement. It replaces the return of a function to pause its execution of the function without losing any local variables.
What is the significance of dividend yield? ›
Dividend yield is a ratio that shows you how much income you earn in dividend payouts per year for every dollar invested in a stock, a mutual fund or an exchange-traded fund (ETF). To put it another way, dividend yield is a security's annual dividend payment expressed as a percentage of its current price.
Is total return the same as Yield to Maturity? ›
Thus, YTM and YTC are estimates only, and should be treated as such. While helpful, it's important to realize that YTM and YTC may not be the same as a bond's total return. Such a figure is only accurately computed when you sell a bond or when it matures.
Does total return include reinvested dividends? ›
The shareholders' return can be measured as total return that includes dividends. The measure "total return" consists of re-invested dividends added to the share price value. Total return, for a given period, is defined as share price performance including the value of all re-invested dividends.
What is the average dividend yield? ›
Basic Info. S&P 500 Dividend Yield is at 1.35%, compared to 1.47% last month and 1.66% last year. This is lower than the long term average of 1.84%.
What does 7% dividend yield mean? ›
Dividend yield is a stock's annual dividend payments to shareholders expressed as a percentage of the stock's current price. This number tells you what you can expect in future income from a stock based on the price you could buy it for today, assuming the dividend remains unchanged.
Why is high dividend yield important? ›
“Companies that have consistently increased their dividends tend to be more stable, higher quality businesses, which historically have weathered downturns and are more likely to have the ability to pay dividends consistently.”
Does dividend payment really matter? ›
Dividend-paying stocks can also improve the overall stock price, once a company declares a dividend that stock becomes more attractive to investors. This increased interest in the company creates demand increasing the value of the stock.
