Are Corporate Dividend Rates Dependent on the Price of the Stock?

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In an effort to create investment income, many investors have turned to corporate stocks that pay dividends. However, many investors are unclear if the corporate dividend rate is dependent on the current price of the stock. The short answer is yes.. and no! Read on for more information.

The amateur economistThe U.S. Federal Reserve has maintained very low interest rates for quite some time. As a result, interest rates on investment products such as CD’s (Certificates of Deposit) and bonds have also been very low by historical standards. In the search for investment income, many investors have turned to stocks, especially those that pay dividends. The increase in investment into stocks has resulted in stock markets reaching all-time highs

Many stocks pay dividends. A company pays dividends on each share of stock outstanding. For example, if Mary Sue (an investor) buys 21 shares of ABC Company and the company pays a dividend of $1.50 per share of stock each year, Mary Sue will receive a yearly dividend of $31.50 (21 X 1.50 = 31.50).

But what is Mary Sue’s dividend yield for the annual $31.50 in dividends that she receives? How is it calculated?

When buying dividend paying stocks, the payment of dividends are usually shown as a percentage or “dividend yield”. Dividend yield is calculated by dividing the annual total of dividends by the current stock price. For example, if ABC Company pays an annual dividend of $1.50 per share and the current price of ABC Company is $67 per share, the current dividend yield for ABC Company stock is 2.2% (1.50 divided into 67 = 0.0223 ).

Using the example above,  Mary Sue bought her 21 shares of ABC Company when the price was $48 per share, not at the current price of $67 per share. Fortunately for Mary Sue, the stock has gone up since she purchased it. Is Mary Sue’s dividend yield 2.2%? No! Her yield is 3.1% (1.50 divided into 48 = 0.031). Mary Sue’s dividend rate is calculated on the day she purchased the stock – not whatever the current stock price might be.  

So the answer to the question of, “Is a corporate dividend rate dependent on the price of the stock?” the answer is yes, but only dependent on the stock price on the day the stock was purchased for that investor.

When buying stock for dividends, also note that:

  • Dividends are usually paid quarterly or semi-annually (not annually as in the examples above). To calculate the dividend yield, be sure and add all the dividends paid during the year to get an annual yield.
  • Some companies pay “special” or “one-time” dividends. Since these are not consistently paid, they should not be considered in the dividend yield calculation. These special dividends can be made for different business reasons.
  • Corporations are not required to pay dividends. A company may start, stop, increase or decrease a dividend at any time (though usually with a vote of the Board and/or shareholders.) However, for shareholder and investor goodwill, corporations usually try to keep up a consistent and regular dividend payout once the dividends start being paid to shareholders.
  • Generally, a company has no direct control over the price of its own stock in the open market. Though its stock price can go up or down with its announced earnings, cash flow and/or the perceived management of the company.
  • Unlike bank CD’s, stocks are generally not insured for loss. Because of this, the risk of owning stock is greater than owning a bank certificate of deposit – hence the higher dividend yields.
  • – Mathematically speaking, should a company’s dividend paid per share remain the same during a twelve month period, the higher the price of the stock, the lower the dividend yield – and the reverse; the lower the stock price, the higher the dividend yield.

Stock dividends can be an option for many investors. Many stocks now have dividend yields that are higher than CD rates. However, all stock investors should understand the risks of owning stocks, as well as understanding a stock’s dividend and how the yield is calculated.