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High income dividend stocks : How is yield calculated ?

High income dividend stocks : How is yield calculated ?

28/10/2010 by about : Stockmarket Trading - 0 Comments - 309 words

We received a number of enquiries, after our recent articles about high yield stocks, from investors seeking greater clarity on the intrinsic difference between yield and income.

With private investors recently seeking stock market safe havens, in times of uncertainty, many online shares investors are searching for stable, blue chip stocks that pay regular, annual high rate dividends, the question is ; what is the real meaning of income and yield in relation to those high yielding FTSE and blue chip stocks.

We thought we would clarify income and yield as it applies to normal stock situations, bearing in mind that, for some more complex instruments and funds, the meaning can vary.

Yield is expressed as a percentage of the share price applicable at the yield calculation date and it is precisely the same as the income that you would receive at that time.

If you held shares, purchased at £1 per share with dividend yield of 4% at the time of purchase, your income applicable precisely at that time, annually would be 4p per share.

However, those hoping to profit in dividends from future stock market growth are liable to be disappointed. As the share price moves to say, for easy calculation purposes, £10 per share, in fact, the applicable yield drops to 0.4% and the income remains the same.

What tends to happen is that yield is consequently readjusted at subsequent interim or full reporting periods as the board acts on advice to re-base the dividend yield given the change in current trading circumstances or net asset value of company at time of writing.

The bottom line is that, contrary to many private investors normal wisdom, the yield does not follow an escalating share price but in fact drops off correspondingly - as it is the income that remains constant.


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