How to Use a Dividend Yield Calculator for Your Investing Strategy

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Contributor, Benzinga
December 20, 2022

Dividend investors accumulate assets that generate passive cash flow. These investors embrace a buy-and-hold strategy so they can focus on other things while dividends compound over time. A dividend yield calculator helps investors discover how much cash flow their capital can produce. This article considers how dividend calculators work and ways to apply them to your strategy.

What Is a Dividend Yield Calculator?

A dividend yield calculator lets you input data to determine an asset’s yield. Figuring out this metric is essential to see how well an investment is performing. For example, if a stock is worth $100 and provides an annualized $2 dividend, that stock has a 2% yield. A higher dividend yield lets you earn more money for holding onto positions. Bumping the average yield in your portfolio from 2% to 4% will double your cash flow. A dividend increase is achievable if you know where to look.

Why Do Investors Use Dividend Yield Calculators?

Dividend calculators give investors a better perspective on their cash flow and help them set targets. You can calculate how much money you need to invest to retire if you know the dividend yield and your cost of living in retirement. For example, an investor might decide only to buy cash-flow-producing assets with yields below 2% or another established benchmark. The dividend yield is a parameter some investors use to screen assets out of their shortlists.

You can use a dividend yield calculator to determine your entry point for a new investment. A dividend calculator can provide that insight and help you determine entry points for assets that don’t align with your dividend yield requirements. A higher yield does not always indicate a better investment opportunity, but dividend yield calculators help you determine assets and price points that match your portfolio criteria.

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Example of an investment using a dividend calculator. [credit: Elevate.Money]

4 Factors That Impact Dividend Yields

When you look up a stock or use a dividend calculator to determine your yield, you get a surface-level understanding of how dividend yields work. However, these yields go several layers deep, and understanding factors that impact dividend yields will help you discern good investments from less favorable ones. The dividend yield equation appears below.

Dividend Yield = Annual dividend payment / Average cost basis

Annual Dividend Payment

Real estate investing can provide monthly payouts if you buy rentals, while most stocks pay quarterly dividend payments. Some dividend yield calculators automatically calculate the annual dividend payment if you provide the dividend payment and frequency. If a rental property produces $500 in cash flow each month, your annual dividend payment is $6,000.

Average Cost Basis

The average cost basis is the average price that you purchased a security. If you bought 10 shares of Stock A at $100 and another 10 shares at $110, your average cost basis is $105. If your average cost basis is lower than the asset’s current market price, your personal yield is higher than what an investor would get from starting a new position at market price. If your average cost basis exceeds the current market price, buying more shares will increase your personal yield.

Dividend Reinvestment

Dividend reinvestment programs (DRIPs) let you reinvest dividend cash flow into assets. These reinvestments will increase your future dividend payouts and compound over time. DRIPs also impact your average cost basis. Reinvesting dividends can speed up your path to wealth, and you can set them up automatically. 

Dividend Hikes

Dividends do not necessarily remain static. Many companies raise their dividends each year. Shareholders may get jittery if a real estate investment trust (REIT) or publicly traded company does not raise its dividend after a year or, even worse, slashes the dividend.

Corporations and real estate investing companies raise their dividends by generating more business. REIT investing and fractional real estate investing can be useful alternatives to traditional stocks that can present higher yields than average. REITs can raise rents on their properties and acquire additional properties. 

Be aware that companies that pay dividends are not required to continue paying them and can cut them completely if they choose to. Additionally, all investing is not without risk, including illiquidity, complete loss of invested capital, limited operating history, conflicts of interest, blind pool risk, and any public health emergency.” It offers no assurance that the REIT will be able to achieve its investment objectives.

Get Higher Yields with Real Estate Investing

Higher yields increase your cash flow, but some cash-flow-producing assets are better than others. Few assets can top real estate due to its monthly cash flow from tenants. Whether you buy property or get started with a real estate crowdfunding platform, you have many ways to gain exposure to an asset that can generate higher yields. At the same time, remember that you must consistently reassess your position an the returns you’re getting because they could change at any time.

Frequently Asked Questions

Q

What is dividend yield and why is it important?

A

Dividend yield measures how much cash flow you will receive from your capital. This calculation helps you assess your current cash flow and how much you can receive by adding a new asset to your portfolio.

Q

What is a good dividend yield to have?

A

Most dividend investors target a yield between 2% and 5%, but you may be able to get higher yields and lower risk through REIT investing and other strategies. A dividend yield does not reflect the complete value of an investment and is one of many factors to consider.

Q

What causes dividends to increase?

A

Dividends increase when the issuing company increases its cash flow and earnings. When the underlying asset grows, higher dividends usually follow.