Annual dividend ÷ Stock price

If the annual dividend per share is 2 dollars and the stock price is 50 dollars, the pre-tax dividend yield is 4%. If the stock price falls to 25 dollars and the dividend outlook remains the same, it appears as 8%. This does not mean the dividend has doubled.

The yield based on the sum of payments over the past 12 months differs from the projected annual yield calculated by multiplying the most recent quarterly dividend by 4. Calculating a one-time special dividend as if it were a recurring annual dividend will result in an inflated figure. You should also check if the screen reflects recent dividend cut announcements or stock splits.

Dividend payout ratio and cash payment capacity

The payout ratio is usually calculated as common stock cash dividends ÷ net income attributable to common shareholders × 100. If annual earnings are 25, and dividends are 10, it is 40%. Using the same criteria, it can also be calculated as DPS ÷ EPS, but you must check for differences due to changes in periods and the number of shares.

A negative dividend payout ratio for a loss-making company does not mean the burden is low. A ratio exceeding 100% may be due to temporary gains or losses, but if it persists, you must verify the funding sources and sustainability. REITs and other sectors have specific accounting characteristics, making it difficult to apply the same criteria based solely on the EPS of a general company.

Check whether free cash flow supports the dividend and covers facility maintenance, debt maturity, and share buybacks. While dividends can be maintained through borrowing or asset sales, whether such a structure is sustainable is a separate issue.

The ex-dividend drop is not free profit

When cash leaves a company, the remaining assets decrease by that amount. In a theoretical example where all other conditions remain equal, you might expect a 50 dollar stock to be priced at 49 dollars after a 1 dollar dividend, with 1 dollar received in cash. Actual market prices fluctuate based on news and supply and demand, so there is no guarantee that the price will drop by exactly 1 dollar.

Considering taxes and fees, buying just before a dividend and selling immediately does not guarantee a profit. There is no set time for the stock price to recover after a dividend is paid.

My performance combines price and dividends

If you hypothetically bought at 50 dollars, the price became 45 dollars, and you received a 2 dollar dividend, your return (excluding taxes, fees, and reinvestment) is (45−50+2)÷50=−6%. Even if you received a dividend yield of 4%, you have an overall loss.

For Korean investors, the KRW exchange rate fluctuates while receiving dollar dividends. Check your KRW-converted returns, withholding tax, and currency exchange costs separately. Since ETF distributions may include various sources other than dividends, do not equate a high distribution rate with stable corporate profit dividends.

Questions to assess sustainability

Check whether dividends are being maintained while revenue, profit, and cash flow are deteriorating, whether short-term maturities are concentrated, or if management has revised the dividend policy. A record of “consecutive years of dividends” is a historical fact, not a guarantee of the future.

Concentrating in one high-dividend sector can leave you simultaneously exposed to changes in interest rates, the economy, and regulations. Growth companies without dividends are not necessarily bad, and high-dividend companies are not necessarily good. Evaluate both business reinvestment opportunities and current pricing.

Check what you have read.

• Is it past dividends or expected dividends?
• Did you mistakenly calculate special dividends as recurring payments?
• Have you checked the cash flow and maturity?
• Have you calculated the total return, including price changes?

Apply what you read to the actual screen

Try it on WAPE

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