What Is a Dividend Yield? How Much Dividends Will I Get?

What Is a Dividend Yield? How Much Dividends Will I Get? on youtube.com/@theDividendExperiment

In this topic, I want to address some of the most common questions that I get on the Trading 212 Pie, such as: If I invest this much into the pie, how much will I get in dividends? 

And, how much do I need to invest to get this much per day? In fact, this can all be explained using the same formula. But first, let me give you the background fundamentals for those of you who are completely new to dividend investing.

So, What Is A Dividend Yield? 

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The percentage of a company’s market price per share that’s distributed to shareholders in the form of dividends is determined by the dividend yield formula, which is an essential part of understanding dividend payout ratios. 

So, if we break that down to a very simple example, we have a stock that’s worth $100, or Pounds, or Euros, or whatever (but I don’t have the pound or euro symbol on my keyboard for whatever reason, so let’s stick with dollars). 

Let’s call this stock X-ARM PLC, known for its stable quarterly dividend payments to shareholders.

This stock X-ARM PLC pays its shareholders 1.25 cents every quarter, so every three months. And that means it’s four times per year. 

Doing some quick math, that means that it has a $5 annual or yearly payout to everyone who owns the stock. So, all we need to find the yield is those two numbers: the stock’s price, $100, and the stock’s annual payout, $5. 

Now, we can divide the payout, $5, by the stock’s price, $100, and we get 0.05, or in other words, 5%. So, X-ARM PLC has a dividend yield of 5%. Easy.

But one thing that we should notice is that the stock price changes every day, or every day that the market’s open, at least, which significantly affects the dividend payout ratio. 

So, as one side of the equation changes, the result will change too. This means the yield actually changes every time the market opens.

So, two investors can buy the same stock, and the yield’s a completely different amount on their original investment depending on what time and price they bought it at, influencing their annual dividend.

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Another point to make is that sometimes companies increase the amount they pay out. Let’s go back to our example of XRM PLC. 

The company sounds like it’d be in the industrial sector, maybe manufacturing or something. So, let’s say the US decided it’s going to increase its defense budget this year, and they agreed to some lucrative contracts with XRM PLC. 

Exxon PLC made more profit this year due to these contracts and wants to pay out to shareholders in the form of dividends.

Management makes an announcement, that they will now pay 1.50 each quarter, so every three months, four times per year, marking a change in their quarterly dividend strategy. And this means that they now pay $6 a year. 

So, if the stock price is still $100, that means the yield is now 6%, a good dividend yield by many standards. Perhaps investors see this rise in dividends and the lucrative defense contracts with the US government, and they think they want to be part of the company and invest in it. 

So, if there are more buyers than sellers, the price of the stock will rise, which can affect the dividend per share negatively if the company’s dividend payment doesn’t increase accordingly. 

If the stock rises to $120 due to investors’ excitement about the prospects of Exxon PLC, now the stock has a dividend payout of $6, and the price of the stock is $120. So, we divide $6 by $120, and we’re back at that yield of 5% for XRM PLC.

But how to calculate the yields for multiple stocks in the portfolio? So, that all makes sense for one stock, but what about when we’re buying a basket of stocks, an ETF, or a Trading 212 Pie, or just calculating for an overall portfolio? It gets a bit more complicated when more than one stock is involved.

Let’s say we have an equal weighting, so 25% each, in the dividend portfolio of four stocks, just to keep it simple for now.

These stocks are Stock A, which pays 2% per year, Stock B, which pays 8% per year with a high dividend yield, Stock C, which pays 4% per year, and Stock D, which pays 6% per year, showing a variety of annual dividend rates. 

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So, four stocks with varying yields. How can we find the overall yield of this portfolio?

What we have to do is multiply the weighting of a portfolio by the yield of the individual stocks, and then we can sum them all up to find the overall yield, which reflects the collective dividend payout ratio of the portfolio.

So, in this case, we would need to do 0.25 times 0.02, 0.25 times 0.08, 0.25 times 0.04, and 0.25 times 0.06. So, use a calculator if you want to save time, or if you’re a math pro, you can do it in your head. 

Either way, you should come up with a total of 0.05, which translates to a 5% overall yield.

Now, if that same investor decides Stock A and B are not pulling their weight and wants to sell them off to invest them into Stock D, so now the portfolio is 75% Stock D, which pays 6%, and still has 25% on Stock C.

So, let’s do that calculation again: 0.75 times 0.06, 0.25 times 0.04. And if you sum up the total of this one, you’ll reach a yield of 0.055, or in terms of yield percentage, 5.5%. 

Obviously, this gets even more complicated the more stocks you hold, as there are even more calculations you need to do. But the principle is exactly the same, even for those 5000-plus stock ETFs, especially when considering their dividend payout ratio.

So, what’s the yield of the almost daily dividend portfolio? The last time I did this calculation shown above, it was about 0.032, or 3.2%, or close enough with some rounding. 

As we saw earlier, the yield actually changes slightly every time the market is open due to the changes in the share price of all the stocks. 

And you’re welcome to use the above method to calculate the exact yield right now of the portfolio. Alternatively, some software and portfolio trackers can estimate your forward-looking yield or calculate your yield from payments that are used and can be recommended.

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How many dividends will I get if I invest this much? Now we have the yield of the portfolio, we can use this to answer the common questions that appear on the chat feed for the pie. 

If I invest $1000 into this pie, how much can I expect in dividends? Now we have the yield, this one’s easy, and calculating the quarterly dividend payment becomes straightforward. 

We bought $1000 worth of stock, so we just multiplied it by the yield, 3.2%, or for the calculators, $1000 times 0.032, to determine our annual dividend income. So, if you invest $1000, you can reasonably expect $32 of dividends per year. 

And then to work out how much per month, you just divide that by 12, which is crucial for calculating the monthly dividend payment. So, in this case, $2.67 per month on average, is helpful for investors focusing on monthly dividend payments.

However, it is important to remember that the payouts won’t be equal each month, as the pie components vary on how much each one pays out. 

Now, the slightly harder question: I want $50 a month, how much do I need to invest? We need to reverse-engineer the question now, as we have the payout and the yield, but not the original amount invested, crucial for understanding the payout ratio. 

That’s what we’re trying to find. So, what we need to do is find the annual payout required. $50 a month would be $600 a year. And then we divide the annual payout by the dividend yield. In this case, it would be $600 divided by 0.032. And if you put that into your calculator, it should come to $18,750.

And there you have it. You can replace any of the numbers used here with whatever numbers you’re looking to find, as it’s just a case of rearranging the formula and plugging it in once you know the required amounts.

Investing is much better when everyone has a better knowledge of what they’re trying to get into, and it’s one of the fundamental legs of the metronome model that I tried to create. I hope that this was useful for you.