Calculate dividend yield and explain why a high figure can be a warning sign.
Dividend yield is the dividends a share has paid over the last year divided by today's share price. It tells you how much cash income the share has produced recently compared with what it costs to buy now.
Wei Ling owns a bank stock, the same one used in Lesson 1.2, "Where dividends come from and how often they are paid". One evening she opens a stock screener, sorts it by dividend yield and scrolls to the top. The yields there are eight, ten and twelve percent. One company she has never heard of shows more than twice the yield of her bank stock, and she wonders why everyone else has missed it. In most cases the market has not missed anything, and a very high yield on an unfamiliar company is the number behaving exactly as it is built to behave.
Use the made-up figures from Lesson 1.2. The share price is S$5.00. Over the past year the bank paid a final dividend of S$0.12 and an interim dividend of S$0.14. Add them: S$0.12 + S$0.14 = S$0.26. Divide by the price: S$0.26 / S$5.00 = 5.2%, which is the bank's dividend yield.
The calculation has two inputs and one division. That makes the number easy to use, and it is also the source of every problem with it, because each input can move for reasons that have nothing to do with how good the dividend is.
The two inputs move at different speeds. The dividend, on top of the fraction, changes once or twice a year. The price, underneath, changes every trading minute. When the price falls and the dividend has not changed yet, the yield goes up, even if the business is no better than it was.
Say Wei Ling's stock drops from S$5.00 to S$4.00 and the payouts stay at S$0.26. The yield is now 6.5%, though nothing about the bank has improved.
A share can get cheaper while paying the same dividend for two broad reasons. Sometimes the whole market falls and good companies fall with it. Often, though, 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 climbs. A sudden jump in yield is often bad news in disguise: it sets last year's dividend against a price that already reflects a worse year ahead. Module 3 follows this idea to where it usually ends, and Lesson 3.1, "How a high yield turns into a loss", has the numbers.
Websites build the figure in two ways. A trailing yield takes the dividends actually paid over the past twelve months and divides by today's price. Every payout in it really happened, though some may be almost a year old. A forward yield takes the dividends that analysts or the website expect over the next twelve months and divides by today's price. It looks ahead, but the top of the fraction is an estimate and may be wrong. Forecasts are often slow to come down when a company is in trouble.
Many websites show one or the other without making clear which. Some label it in small print, some in a tooltip, and some not at all. Before you compare two stocks, check that both yields are the same kind. A trailing yield on one and a forward yield on the other is not a valid comparison.
Most websites add up every payout from the last twelve months, specials included. A special dividend is a one-off payment, separate from the regular interim and final dividends. Wei Ling's bank paid a S$0.20 special in November from the sale of a building. If you include it, the trailing yield is S$0.46 / S$5.00 = 9.2%, and for twelve months the bank would look like one of the highest payers on the exchange. Once the special drops out of the twelve-month window, the yield falls back to around 5%, though the business is unchanged. Anyone who bought because of the 9.2% figure paid for a one-off. Lesson 3.3, "One-offs, specials and payouts that will not repeat", takes specials further and covers REIT distributions that are partly capital.
When you calculate a trailing yield yourself, use only the regular payouts, the interim and the final, and leave out anything labelled special.
Working out a 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 company's investor relations page, and today's share price. Then:
Keep the interim and final payouts and leave out anything labelled special. Add up the regular payouts per share. Divide the total by today's share price. Compare your result with the yield a screener or broker shows for the same stock. If the two differ, find out why. The website may have included a special, shown a forward figure instead of a trailing one, used a different date window, or counted a payment made in another currency.
Each difference you track down is one you will spot straight away 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.
Pick three SGX stocks, add up each one's dividends for the last twelve months and divide by today's price. Then compare your figure with the yield a website shows.
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