Dividend Yield

Ahhhh dividends. The sign of the truly well-to-do company.

When a company has nothing better to do with its cash…and it has bought all of the corporate jets it wants, put in fountains in the executive suite bathrooms, and offered massage and dog therapy to all of its employees…it then can, at its own discretion, pay a dividend to its common shareholders of record.

Common. Shareholders.

Yep. That's who gets dividends. If you are an employee at a company and got, say, a bunch of stock options when the company signed you, you don't get dividends unless you buy out your options and turn them into actual shares. Dividends get paid quarterly in almost all companies in the U.S., and companies typically "declare" what their dividend will be a year or two or three in advance.

The Street doesn’t like surprises. So DaddyWarbux Rifles has made bank in this NeoZombie Apocalypse, and after buying all of the anti-zombie spray it ever wanted…along with the jets...and fountain…and doggy meditation classes…it has extra cash.

It plans to dividend out that cash on a regular basis, and just like most companies, it has forecasted earnings 3-4 years or more into the future. This dividend payout will be some relatively modest percentage of earnings.

Like…if earnings will likely be something like 50 million then 70 million then 90 million the next 3 years, the dividend might be declared as 25 million .

Doing the math here…that’d be a 50 percent of earnings payout ratio in year one...but if they keep the dividend flat and don't raise it, it'd be just 25 over 70 or 36 percent payout in year two…and if they still keep it flat in year three it’d be just 25 over 90, or 28 percent.

And in real life, odds are good they’d raise their dividend if their earnings performance was this good. So what then is the dividend yield here to investors who own a share of common stock?

Well, if the stock was trading for $40 a share and the dividend was 60 cents, then the dividend yield would be 60 over 4,000, or 1.5%. If the stock ran up to 60 bucks a share and the yield remained 60 cents, the yield would be 1%.

And if the stock tanked to 10 bucks a share and the dividend was still 60 cents a share, the yield would be 6%. Yield a la dividend.

And what should you with the few bucks you’ll make each month from your dividends? Might want to stock up on that zombie spray.