Fact checked by Timothy Li
Dividend Rate vs. Dividend Yield: An Overview
A dividend is the total amount of money that an investor receives as income from owning shares of a company, or another dividend-yielding asset, during the fiscal year. The dividend rate is another way of saying dividend. More specifically, when you hear people talking about dividends in dollar figures in the media, or elsewhere, they are referring to the dividend rate.
Alternatively, stock dividends can also be quoted using the dividend yield, which is expressed as a percentage. You can think of the dividend yield as the percent return that an investor would expect to earn on their investment based on the current share price.
Dividend-paying stocks are very popular with investors because they provide a regular, steady stream of income. Companies that experience big cash flows and don’t need to reinvest their money are the ones that normally pay out dividends to their investors.
Dividend-rich industries include companies in the healthcare and energy sectors, essential consumer product producers, household goods producers, food and beverages, and utilities. Some popular companies that pay out dividends are:
- Apple Inc. (AAPL)
- The Coca-Cola Co. (KO)
- ExxonMobil Corp. (XOM)
- Verizon Communications Inc. (VZ)
- Pfizer Inc. (PFE)
- McDonald’s Corp. (MCD)
Key Takeaways
- A company’s dividend or dividend rate is expressed as a dollar figure and is the combined total of dividend payments expected.
- The dividend yield is expressed as a percentage and represents the ratio of a company’s annual dividend compared to its share price.
- You are more likely to see the dividend yield quoted than the dividend rate because it tells you the most efficient way to earn a return.
- The dividend rate provides stable income by paying a fixed dollar amount per share, while dividend yield fluctuates with stock price.
- Dividend changes impact both metrics differently; rate increases boost income directly, while yield changes often reflect stock price movement.
Dividend Rate
One of the ways to calculate how much income an investor receives from an investment is the dividend rate. This rate is the combined total of dividend payments expected. These dividends may come from stocks or other investments, funds, or a portfolio. The dividend rate is generally expressed on an annualized basis. Additional dividends that are not recurring may not be included in this figure.
Dividend rates are expressed as an actual dollar amount and not a percentage, which is the amount per share that an investor receives when the dividend is paid. The rate may be either fixed or adjustable, depending on the company.
Here’s an example: Let’s assume that Company X’s stock pays an annual dividend of $4 per share in four quarterly payments. So for each payment, an investor receives a dividend of $1. The dividend rates are $1 per quarter and $4 annually. Quarterly dividends are the most common for U.S.-based dividend-paying companies. However, some companies will distribute dividends annually, semiannually, or even monthly.
When the dividend rate is quoted as a dollar amount per share, it may also be referred to as dividend per share (DPS). You can usually see the accounting history of a company’s dividend payments in the investor relations portion of its website.
There are other kinds of dividends as well. Some companies choose to pay out dividends in the form of extra stock or even property. Companies may do this when they decide they want to pay out dividends but need to hold on to some extra cash for liquidity or expansion.
Important
Most high-growth companies, including those in the tech or biotech sectors, do not pay investors dividends.
Dividend Yield
Another way to determine investment income is through the dividend yield. This represents the ratio of a company’s current annual dividend compared to its current share price. Generally speaking, when the dividend remains the same and the share price drops, the dividend yield rises. The yield will fall if the stock price rises.
The dividend yield is quoted as a percentage rather than a dollar amount by taking the annual dividend, dividing it by the share price, and multiplying that number by 100. Unfortunately, the calculation for dividend yields presents some problems.
Dividend yields can vary wildly, so the calculated yield may actually have little bearing on the future rate of return (ROR). Additionally, dividend yields are inversely related to the share price, so a rise in yield may be bad if it occurs only because the company’s stock price is plummeting.
As an investor, you are more likely to see the dividend yield quoted than the dividend rate. The initial reason for this makes sense: A company that pays out dividends at a higher percentage of its share price is offering a greater return for its shareholders’ investments.
It is better to receive $3 in dividends on a $50 stock than $5 in dividends on a $100 stock because the investor could ostensibly just purchase two of the $50 shares and receive $6 in dividends that way.
The dividend yield tells you the most efficient way to earn a return. Unsurprisingly, the dividend yield is one of the most common metrics income investors use for comparing different income-paying assets.
Special Considerations
Dividend yield and dividend rate serve distinct roles in evaluating income and market value. The dividend rate is a fixed dollar amount per share, providing stability for income-focused investors, while dividend yield reflects the return relative to the share price, fluctuating with market changes.
A high yield might suggest undervaluation or risk if the share price has recently dropped, while a low yield often points to a company prioritizing growth over immediate income.
Market volatility affects yield more than rate, as yield moves with stock price while the dividend rate remains stable unless changed by the company. A rising yield could indicate lower stock prices and potential issues, while high rates typically appeal to investors valuing steady income.
Companies with high yields but lower rates generally appeal to investors valuing steady income. Companies with high yields but lower rates may be reinvesting in growth while rewarding shareholders.
Dividend changes impact both metrics differently. An increased rate directly increases income, while cuts may lead to price drops, lowering yield and signaling possible financial challenges. Tracking policy changes is important, as reductions can indicate issues, while increases usually show financial strength.
Lastly, tax implications vary. Higher rates increase taxable income, whereas yield may impact capital gains tax depending on stock performance. Those seeking tax efficiency might favor stocks with lower rates, preferring gains taxed only when sold, while others prioritize ongoing income.
What Is More Important, Dividend Rate or Dividend Yield?
At first glance, the terms “dividend rate” and “dividend yield” may sound like they are quite different. However, upon closer examination, investors quickly learn that the two metrics are both important and connected.
The root of each metric is the underlying need for investors to understand the amount of reward that they are expecting to earn in the form of dividend payouts over the fiscal year. Which one is more important will really come down to the use case. The dividend rate is stated in dollar terms. The dividend yield is stated as a percentage of the dividend rate divided by the current price.
What Is Dividend Rate?
The dividend rate, also known as the dividend, is the amount of money received by the investors as income due to owning shares of a dividend-paying company. Not all companies pay dividends, so it is not uncommon to see the value of “n/a” on quote pages across the financial media. A value of 2.50 means that the company is expected to pay $2.50 per share to its shareholders over the course of the fiscal year, whether in quarterly installments, semiannually, or yearly.
What Is a Good Dividend Yield?
Dividend yields will vary by sector and industry. Some dividend yields may seem insignificant at first glance, while relatively high yields—say, more than 5%—often get much attention.
What makes a dividend yield good is highly subjective and subject to change based on market whims. However, what is important to note is that small amounts paid out over decades can often be much more lucrative than short-term payments that draw attention but may not be sustainable over the long term.
The Bottom Line
A company’s dividend or dividend rate is expressed as a dollar figure representing the full amount of dividend payments expected. Meanwhile, dividend yield is a percentage representing the ratio of a company’s annual dividend compared to its share price.
Both metrics are important for equities investors. While the dividend rate indicates total expected income, the dividend yield provides more information on the rate of return and can be useful in comparing different income-paying assets.