Dividend Rate vs. Dividend Yield

Dividend investors aim to build cash flow and get stock appreciation along the way. Many companies raise their dividends every year, and compounded growth can help investors retire early. These investments give you cash flow in far less time than real estate, but investors should know the basics before getting started. Knowing the differences between dividend rate vs. dividend yield can help you make better investments that align with your portfolio objectives.

What is Dividend Rate?

The dividend rate is the annual dividend you receive from a company if you own a single share. If a company pays out a $1 quarterly dividend, the dividend rate is $4 per year. This is the most accurate way to calculate the dividend rate. Investors should keep in mind that some companies pay monthly dividends. In these cases, you have to multiply the monthly dividend payment by 12 to arrive at the annual dividend rate. 

Investors can also use the dividend yield to arrive at the dividend rate. If a $50 stock has a 1% dividend yield, the annual dividend rate is $0.50. This calculation can also help you find the dividend rate, but it becomes more cumbersome to calculate when decimals are involved. For instance, most investors will need a calculator to figure out the dividend rate of a company valued at $53.28 per share with a 2.72% dividend yield. It is easier to multiply a quarterly dividend payment by four, and it leads to a precise dividend rate.

A higher dividend rate means you earn a higher dividend for each share. The dividend rate can increase each year if the company continues to hike its dividend.

Pros

• Know how many shares you need to achieve your goal: If you want to earn $100 per year in dividends, and a stock’s dividend rate is $2, you need to buy 50 shares. 
• Build your cash flow: The corporations do the work for you and reward long-term investors.
• Reinvest: Investors can use the dividend rate to calculate how many shares they need to get an extra share every quarter through a dividend reinvestment plan. If a stock is valued at $50 per share and rewards a quarterly dividend of $0.50, you need 100 shares to get a new share every quarter (assuming the price stays the same).

Cons

• Dividend rate does not reflect the return on investment: A dividend stock may seem like a good investment if it has a dividend rate of $2. However, if shares cost $500, you get a low cash return on your investment. Shares can still appreciate, but it’s not the best choice for a dividend income investor.
• A dividend is only as good as a company’s ability to support it: AT&T remained a popular dividend stock for several years solely because of its high dividend rate relative to the stock price. The company has since cut its dividend, and the share price has tumbled. While investors receive high dividend rates, shares are down by almost 20% year-to-date.
• Missing growth opportunities: Some non-dividend-paying companies outperform stocks that pay dividends.

What is Dividend Yield?

A dividend yield is another metric investors use to gauge how much cash flow they will receive from their investments. The dividend yield is a percentage that helps you calculate how much you earn if you put X dollars into a stock. While the dividend rate focuses on the number of shares, dividend yield focuses on your principal investment.

For instance, if a stock offers a 5% dividend yield, it means your $10,000 will generate $500 each year, excluding dividend hikes. Dividend yield allows investors to focus more on the return on their capital than on acquiring enough shares to reach a goal. If you want to earn $20,000 every year on a 4% yield, you can perform the calculation ($20,000 / 4%) to determine you would need $500,000 at a 4% yield to achieve your goal.

Pros

• Fractional shares are more useful: It doesn’t matter if you cannot buy an entire share. Yield investors focus on the cash flow that comes from their capital. For the dividend rate, you need the entire share to get the full rate.
• Price declines raise the yield If the stock’s price falls, you can secure a higher dividend yield with future purchases and reinvestments. Some dividend investors want to see their stocks take a temporary hit before the dividend payment date.
• Know how much capital you need: Knowing your annual dividend goal and your desired yield makes it easier to calculate how much capital you need to make it happen.

Cons

• Yield chasing: A high yield does not always indicate a good buying opportunity. AT&T had a high yield for many years, but a dividend cut and declining share price have hurt investors.
• A rising stock price lowers the yield: If the stock price enters a rally, you will get a lower yield for your money.
• Investors may get scared by low yields: Some dividend stocks have yields below 1%. That may scare investors, but some of these same stocks outperform the majority of the market.

Key Differences Between Dividend Rate and Dividend Yield

Dividend rate and dividend yield are key numbers that help dividend investors plan for retirement and assess portfolio performance. These are some of the key differences between the dividend rate and dividend yield.

High Dividend Rate but Low Dividend Yield

Some stocks have high dividend rates but low dividend yields. Broadcom Inc. (NASDAQ: AVGO) has an $18.40 dividend rate. That’s a lot of cash flow for a single share, but the stock is closing in on $900 per share. AVGO shares only yield 2.08% for new investors. 

High Dividend Yield But Low Dividend Rate

A stock with a lower price will have a lower dividend rate, but it can still have a high dividend yield. Verizon Communications Inc. (NYSE: VZ) currently pays an annual dividend rate of $2.61. That’s not as much as Broadcom’s dividend rate, but Verizon stock has a higher dividend yield. Recent downward pressure on the stock has bumped the dividend yield to 7.50%.

Even though Verizon has a lower dividend rate, you receive more cash flow for every dollar you put into Verizon stock than for every dollar you put into Broadcom stock. 

Personal Dividend Yield vs. Universal Dividend Rate

The dividend rate is universal among all investors. Every Broadcom investor receives a dividend rate of $18.40, and every Verizon investor receives a dividend rate of $2.61. Those dividend rates can increase as both companies hike their dividends, but it is universal among investors.

However, dividend yields among investors are not universal. Dividend yields depend on your cost basis. An investor with an average cost basis of $500 per share for AVGO stock enjoys a higher personal yield than an investor with an average cost basis of $600 per share for AVGO stock. Investors can arrive at their personal yield by dividing the annual dividend payment by their average cost basis per share. Your average cost basis per share is likely different from the market price.

Building Your Dividend Portfolio

A dividend portfolio consists of several stocks. Diversifying across many industries can reduce your risk and potentially increase your returns. Knowing whether you want to prioritize a stock’s dividend rate or dividend yield can help you make decisions that align with your long-term financial goals. 

Frequently Asked Questions