You will be able to calculate dividend yield and explain why a high number can mean bad news.
One evening Wei Ling opened a stock screener, sorted it by dividend yield and scrolled to the top, where the figures ran to eight, ten and twelve percent. One company she had never heard of showed more than twice the yield of her bank stock, and she wondered why everyone else had missed it.
Usually nobody has missed anything. The number at the top of that list is doing exactly what it was built to do, and once you know how it is built, you read it very differently.
Dividend yield is the dividends paid per share over the last year, divided by today's share price. It tells you how much cash income the share has produced recently, relative to what it costs now.
Take Wei Ling's own stock from lesson 1.2, Where dividends come from and how often they are paid, with the same made-up figures: a share price of S$5.00, and over the past twelve months a final of S$0.12 and an interim of S$0.14. Those add up to S$0.26, and S$0.26 divided by S$5.00 gives a yield of 5.2%.
Two inputs, one division. The simplicity is useful, and it is also the source of every problem with the number, because each input can move for reasons that have nothing to do with how good the dividend is.
The dividends in the top of the fraction change once or twice a year. The price in the bottom changes every trading minute.
So when a share price falls and the dividend has not yet changed, the yield goes up. If Wei Ling's stock dropped from S$5.00 to S$4.00 while the last year's payouts stayed at S$0.26, the yield would rise to 6.5% even though the business had not improved in any way, because the only thing that changed was the price.
Why would a share get cheaper while still paying the same dividend? Sometimes the whole market falls, and good companies fall with it. But often the market has seen something worrying, such as falling profits, rising debt or a hint from management, and expects the next dividend to be lower. Buyers sell early, the price drops, and the yield calculated on last year's payouts climbs.
So a sudden jump in yield is often bad news in disguise, since the figure sets last year's dividend against a price that has already priced in a worse year ahead. Module 3 follows this to its usual end, and lesson 3.1, How a high yield turns into a loss, has the numbers.
What you have just calculated is a trailing yield: the dividends actually paid over the past twelve months, divided by today's price. Every payout in it really happened, though some of them happened almost a year ago.
A forward yield uses a forecast instead. It takes the dividends analysts or the website expect over the next twelve months and divides them by today's price. It looks ahead, but the top of the fraction is an estimate that may be wrong, and estimates are often slow to drop when a company is in trouble.
Many websites show one or the other without making it obvious. Some label it in small print, some in a tooltip, some not at all. Before you compare two stocks, check that both figures are the same kind. A trailing yield on one and a forward yield on the other is not a comparison.
Recall Wei Ling's November payment, the S$0.20 special dividend from a building sale. Most websites take every payout from the last twelve months and add it up. Include the special and her stock's trailing yield becomes S$0.46 divided by S$5.00, or 9.2%.
For the next twelve months, the stock will look like one of the highest payers on the exchange. When the special drops out of the window, the yield falls back to around 5%, though the business is just as it was. Anyone who bought because of the 9.2% was paying for a one-off.
So when you calculate a trailing yield yourself, use only the regular payouts. Go through the last twelve months of announcements, keep the interim and final dividends, and leave out anything labelled special. Lesson 3.3, One-offs, specials and payouts that will not repeat, takes this further and covers REIT distributions that are partly capital.
Calculating yield yourself takes a few minutes and teaches you more than reading it off a screen. You need the dividend announcements for the past twelve months from SGXNet or the investor relations page, and today's price.
Add up the regular payouts per share. Divide by the price. Then compare your figure with what a screener or broker shows for the same stock. If they differ, find out why: a special included, a forward figure instead of trailing, a different date window, or a payment in another currency. Each difference you track down is one you will spot instantly next time.
In the activity you will run this for three SGX stocks, and the differences you find will tell you a good deal about how the websites build their numbers.
Calculate the trailing yield of three SGX stocks by hand from their last twelve months of dividends and compare with a website's figure.
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