Dividend Yield

The dividend yield is computed by dividing the annual dividend by the stock price. Older, slow-growth companies usually have a relatively high dividend yield, because they have fewer investment opportunities and thus tend to return more earnings to shareholders. Newer, high-growth companies usually have a low or no dividend yield, because most or all of their earnings are reinvested in their business. For a slow-growth firm with fewer prospects of substantial price appreciation, the higher dividend yield serves to make the stock more attractive and support the stock price. Dividend yield plays a key role in the Dogs of the Dow investment strategy, in which investors rotate into those blue-chips with the highest dividend yield. But beware: a high dividend yield is no sure measure of a safe, high-return investment. A stock may have a high dividend yield only because its price has fallen sharply on expectations that the company faces hard times and will cut its dividend.