Dividend Rate vs. Dividend Yield – What Investors Should Look For

Dividend strategies allow investors a calculable passive income
A high dividend yield is a key factor when choosing a dividend stock
Dividend Aristocrats have increased their dividends for at least 25 straight years

Dividend-paying stocks

Companies with large positive cash flows that don’t need to reinvest their money for growth or research often pay dividends to their investors. These are often stable defaults such as communications companies, consumer staples manufacturers, insurance companies or energy, healthcare or industrial companies, according to Wendelin Probst from Lynx. The growth of these stocks is often lower, so the profits are relatively easy to predict and some of them are paid out to the shareholders. Historically, dividend stocks are also subject to lower price fluctuations than, for example, growth stocks or small caps. But how do you find good dividend stocks and what’s the difference between dividend rate and dividend yield?

Dividend Rate vs. Dividend Yield

The dividend rate describes the income an investor receives from their investment in the form of dividends. The dividend rate is usually expressed as an annual amount and as an actual amount of money, for example in euros or US dollars, and not as a percentage. For example, if a company pays $2 in dividends per share and that dividend is paid four times a year, the dividend rate is $8. Dividend yield, on the other hand, is the ratio of a company’s annual dividend to its share price. The information is given here as a percentage. A company’s dividend yield is calculated by dividing its annual dividend by its stock price and multiplying that number by 100. So, for example, if a company pays $5 in dividends per year and the company’s stock price is $120, the dividend yield is 4.2 percent.

What percentage of my invested amount do I get back in the form of dividends? The dividend yield answers this question and consequently this value shows how one can most efficiently generate a return. Because of this, investors should focus on the dividend yield rather than the dividend rate, according to Yahoo Finance’s Ashley Kilroy.

Dividend stocks and Dividend Aristocrats

Even if investors follow a dividend approach, the stocks in the portfolio should be chosen wisely. Of course, dividends can also be reduced or canceled or the company’s profits can decrease. That’s why the US has some sort of award for companies that have increased their dividends for 25 consecutive years. They receive the title “dividend aristocrat”, which stands for an above-average dividend development over a long period of time. The companies have proven that they have been able to operate successfully over a period of 25 years and that the business model is so stable that the dividend could also be increased in less strong years. The most well-known dividend aristocrats include, for example, the Buffett investment Coca-Cola, but also Johnson & Johnson, P&G and McDonalds.

But there are also popular dividend stocks with high dividend yields in Germany, such as the stocks from BASF, Allianz, Munich Re or E.ON.

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