What are Dividend Yields?
Well put simply they are the level of income attracted to the ownership of a given share. They are expressed as a percentage, the higher the percentage the more favourable the yield.
The importance of what dividend yields are is not lost on the professional investor. They are the central tenet of the passive income builder.
They are an important measure of a shares value as a consistently high paying yield is valuable and worthy of owning.
Some would argue that dividend yields are less important in a world where share value appreciation and sky rocket returns are the holy grail. Just think “dot com listings”!
Yields are though the main stay of the savvy investor. Any company that cannot develop decent yields is likely over time to be an investment that falls out of favour.
Owners of shares put a great deal of importance in yields. They should represent a consistent income stream attached to ownership.
Over time they should help deliver an above inflation return on the investment in a share.
The Appeal of Yields and Know the Risks
The great appeal of yields is their ability to out perform income returns on bank deposits. In the UK percentage returns on bank deposited savings are averaging around 1.5%. That is actually less than the current rate of UK inflation, somewhere around 2.5%.
When you put that into context, money saved with a bank is actually losing some of it’s purchasing power to inflation.
It is important to remember the flip side of share ownership comes with risk. As ever, money invested in the stock market can go up as well as down. The same goes for dividend yields, they rise and fall. The smart investor needs to keep a beady eye on the performance of the companies whose shares they own.
Where did Dividend Yields Originate from?
Company owners invented the dividend yield as a mechanism to encourage the appeal of their shares. In essence an investment that pays a constant return for owning it is clearly more appealing than an investment which pays no income. The first recorded dividend having been paid by the Dutch East India Company. The company having paid yields of 18%, wow!
Dividend Performance Analysis
You will see from our analysis of the top paying yields for the FTSE 100 top FTSE 100 yields are currently averaging around 8.3%. That is somewhat higher than the UK banked saving deposit average of 1.5%.
Part of the trick in share ownership is to select a share that pays a sustainable and above inflation return to the owner over many years.
Further explanation of dividend yields can be found at wikipedia.