Why Relative Yield Is More Important Than Absolute Yield to Dividend Investors
Dividend stocks are a tempting source of passive income, but many investors might consider the dividend yield of individual stocks only at face value. For instance, Hormel Foods (NYSE: HRL) yields 2.4%, and Chevron (NYSE: CVX) is offering a dividend yield of 3.5%. Based on these yields alone, which is the better dividend stock?
If the only thing you consider is the absolute level of the dividend yield, you risk making a very big mistake. Here's why it may be even more important to think about yield in a relative sense.
A share of stock is a claim on the future cash flows that a company is expected to produce. A dividend is a cash return on that claim, usually paid quarterly. Dividend yield is a way to quantify that return and is as simple as annualizing the current quarterly dividend and dividing it by the current stock price to arrive at a percentage. Higher yields indicate higher cash returns.
Source Fool.com
