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What Determines A Dividend Stock’s Yield

Dividends4Life

Dividends4Life

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If income investing were as simple as picking the stock with the highest yield, everyone would be an expert. Most assume (rightfully so) that yield is heavily influenced by risk, but much more goes into determining yield. Below are several important factors that influence a stock’s yield, along with some illustrative examples:

Industry

Have you ever noticed that stocks within an industry often have similar yields? This makes sense when you consider they often have like operations with similar processes, cost structures and margins. This is evident when you look at retailers who buy similar products, resell them in a physical location and have fairly low margins due to the intense competition. Note the yield similarity of Target Corp. (TGT) with a 1.3% yield and Costco (COST) with a 1.5% yield. Even WalMart (WMT) with their economies of scale and focus on efficiency has a yield only slightly higher at 2.4%. The same analysis could be done with The Coca-Cola Company (KO) with a 3.4% yield and Pepsico, Inc. (PEP) with a 3.1% yield.

Maturity and Growth Potential

When Microsoft (MSFT) and Intel (INTC) were formed they paid no dividend. Instead they funneled all their cash back into growing the business. As they matured and growth slowed, each began to pay a very nominal dividend. Today, as they have continued to mature, their yields have continued to increase with MSFT paying 2.0% and INTC paying 3.0%.

Legal Considerations

Real Estate Investment Trusts (REIT), such as Realty Income Corp. (O) and HCP, Inc. (HCP), are not taxed as standalone entities. Instead, they are legally required each year to pay out a certain percentage of their profits as dividends. In effect this forces the shareholders to incur the tax as earnings are generated, leaving the company very little to fund growth. To pay for growth, REIT’s usually have to issue debt and/or equity. All of this combined usually results in REITs having a higher than average yield, for example O yields 5.8% and HCP yields 6.2%.

Risk

Risk still plays an important role in setting the yield for a company. Consider these energy companies with a similar yields: Chevron Corp. (CVX) with a 4.0% yield, Exxon Mobil Corp. (XOM) with a 3.0% yield and ConocoPhillips (COP) with a 4.1% yield. Then there is BP plc (BP) with a 9.0% yield. Is there any question which of these is the more risky stock to own?

The above list is not meant to be an exhaustive, but highlights some of the more common drivers of yield. When we see a yield that appears to be too good to true, we need to ask ourselves why is the yield so high, and is it sustainable?

Full Disclosure: Long CVX, JNJ, ABT, MCD, PG, KO. See a list of all my income holdings here.

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About the author:

Dividends4Life
Visit Dividends4Life at:
http://www.dividend-growth-stocks.com/

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Comments

srbossjock
Srbossjock - 4 years ago


I hit this story because I wanted to learn something. I got absolutely nothing out of this. If you're going to write an article entitled "What Determines A Dividend Stock’s Yield" then please be prepared to tell us just that. This was my first visit to this website. If all your articles are like this one, then "No, Thanks." By the way, I hope my email address hasn't wound up on 57 other websites now and I'll be dumping spam for the next six months!

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