Dividend Yield

Definition

Dividend yield is the annual cash dividend per share divided by the share price. It shows how much cash flow you get for each dollar invested.

Interpretation & Usage

• Higher yield: More immediate income, attractive to income-focused investors.

• Lower yield: Common in high-growth companies that reinvest rather than pay dividends.

Buy/Sell Strategy:

• Buy: Companies with stable or rising yields, especially above government bond yields or peer group averages.

• Sell: When the yield is unusually high due to a falling share price (a “dividend trap”), or when a company cuts its dividend.

Real-World Example:

AT&T (T) has often attracted income investors with a high yield, while Apple (AAPL), a tech growth stock, has a lower yield but strong dividend growth

Dividend Payout Ratio

Definition

The dividend payout ratio measures the percentage of net income paid out as dividends.

Interpretation & Usage

• Low payout (<40%): More profits retained for growth; more sustainable.

• High payout (>70%): Less room for growth, possibly at risk of future cuts.

Buy/Sell Strategy:

• Buy: Companies with moderate, sustainable payout ratios and earnings stability (often 30–60%).

• Sell: If payout ratio is rising unsustainably (e.g., above 100%—paying out more than they earn), or the company is forced to cut dividends.

Real-World Example:

Procter & Gamble (PG) maintains a steady payout ratio, signaling reliability, while some cyclical companies have erratic payout ratios in tough years.

Dividend Growth Rate

Definition

The dividend growth rate measures the annualized percentage increase in dividends per share over time.

Interpretation & Usage

• High and consistent growth: Indicates management confidence, healthy business, and often leads to share price appreciation.

• Erratic or declining growth: Can signal financial strain or a maturing business.

Buy/Sell Strategy:

• Buy: “Dividend Aristocrats” or “Dividend Kings”—firms with 10+ or 25+ years of consecutive growth—are favorites for defensive, long-term investors.

• Sell: Dividend growth stalls or reverses; potential sign of earnings issues.

Real-World Example:

Coca-Cola (KO) has raised its dividend for over 60 years, making it a classic dividend growth holding.

Share Buybacks (Share Repurchase Programs)

Definition

Share buybacks occur when a company purchases its own shares, reducing the number of shares outstanding and often boosting earnings per share (EPS).

Interpretation & Usage

• Buybacks return capital to shareholders indirectly (by supporting the share price) and can signal management’s belief the shares are undervalued.

• They also increase each shareholder’s ownership percentage.

Buy/Sell Strategy:

• Buy: When buybacks are funded from strong free cash flow, not excessive debt, and occur at reasonable valuations.

• Sell: If buybacks are used to mask stagnating EPS growth, or are funded by borrowing during weak business conditions.

• Real-World Example:

Apple (AAPL) and Microsoft (MSFT) have used large, consistent buybacks to return capital and support long-term share price appreciation.

Retained Earnings Strategies

Definition

Retained earnings are cumulative profits not paid as dividends but reinvested into the business for growth, acquisitions, R&D, or debt repayment.

Interpretation & Usage

• High retained earnings, when invested wisely, can drive future growth and higher stock prices.

• However, if management fails to earn a good return on retained earnings, it may be better to return more to shareholders.

Buy/Sell Strategy:

• Buy: Companies with a track record of deploying retained earnings at high returns on invested capital (ROIC).

• Sell: Companies hoarding cash without productive reinvestment or returning it to shareholders.

• Real-World Example:

Berkshire Hathaway (BRK.A), led by Warren Buffett, is famous for not paying dividends, but using retained earnings for successful investments and acquisitions, compounding shareholder value.

How Investors Use Dividend & Shareholder Return Metrics

• Income Investors: Seek high, safe yields and steady dividend growth for reliable cash flow.

• Growth Investors: May tolerate lower current yield if dividend growth or buybacks are high, signaling future income and capital gains.

• Total Return Investors: Favor companies that balance dividends, buybacks, and growth investments for the best risk-adjusted returns.

• Value/Contrarian Investors: Sometimes buy stocks after a dividend cut if they believe the core business will recover and dividends will resume.

Practical Portfolio Example:

A retiree might buy stocks like Johnson & Johnson (JNJ) (steady yield, dividend growth), avoid cyclical companies with erratic payouts, and favor companies with prudent buybacks (not just high yields).

References

Graham, B. & Dodd, D. (2009). Security Analysis: Sixth Edition. McGraw-Hill.

Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.

CFA Institute. (2023). CFA Level 1 Curriculum – Equity Investments.

White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.

Investopedia. (2024). “Dividend Yield,” “Dividend Payout Ratio,” “Dividend Growth Rate,” “Share Buybacks.”

Yahoo Finance, Company Filings and Data.