What Is a Good Dividend Yield?

What constitutes a good dividend yield is relative to the market conditions in a period in addition to the types of payments comparable companies are making. Generally speaking, a higher dividend yield is more attractive than a lower yield, because the yield reflects the types of returns that you earn. Nonetheless, a dividend yield may be driven higher by factors that disguise the fact that an investment is not a good choice.

Overview

Dividends are quarterly cash payments that companies make to shareholders as an incentive to invest in the stock. To get the dividend yield, which is expressed as a percent, the average yearly payout is divided by the stock's latest price, or market value. A stock's dividend yield coupled with returns earned from a rising stock price comprise the investment's total return. A dividend yield can be driven higher by one of two factors: either the company is raising the size of its payout or the market value is falling.

Profits

A good dividend yield is one that is rising because a company's profits are increasing and they are subsequently lifting the size of their payout. Of the 400 companies included in the S&P; 500 index, 128 increased the size of their distribution in the 12-month period leading up to March 2012, according to a 2012 "USA Today" article. At that time, the average dividend yield was 2.16 percent. A good yield would be one that is inline with or higher than the average at that time.

Payout Ratio

A good dividend yield is one that will not come to an abrupt end. While you can't always know when a company will experience financial hardship and decide to suspend its dividend, you can look for some telling signs, such as the payout ratio. A payout ratio is learned by dividing a stock's dividend by its earnings per share, both of which are disclosed on a quarterly basis. The higher the result, the more of the company's earnings it is depending on to reward investors with dividends. If a payout ratio is near or surpasses 100, the company may not be able to afford making payments in the future. The lower the result the more likely the company can sustain its dividend commitments.

Bond Comparison

Dividend stocks are often compared with bonds because both investments provide investors with a stream of ongoing income. To determine whether or not a stock has a good dividend yield, compare the stock's yield to those being offered by government Treasury bonds. Even though income is staple for bonds and optional for stocks, when bonds are offering especially low yields, dividend yields may look more attractive. For instance, in 2012, the yield on the 10-year Treasury bond dropped below 1.5 percent, while several stocks had much greater dividend yield of more than 5 percent, according to a 2012 "Forbes" article.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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