Effective Yield

finance a la shmoop what is dividend yield? ah dividends the sign of the truly

well-to-do company well when a company has nothing better to do with its cash

and it has bought all of the corporate jets it wanted put in fountains in the [Fountain of water appears]

executive suite bathrooms and offered massage and dog therapy to all of its

employees it can then at its own discretion pay a dividend to its common

shareholders of record common shareholders yep that's who gets

dividends if you're an employee at a company and got say a bunch of stock [Employee stood beside company]

options when the company signed you you don't get dividends unless you buy out

your stock options and turn them into actual shares or common stock yeah well

dividends get paid quarterly in almost all companies in the US and companies

typically "declare" what their dividend will be a year or two or

three in advance if they can Wall Street does not like surprises so Daddy [Wall Street appears]

Warbucks rifles has made Bank in this neo zombie apocalypse and after buying

all of the anti zombie spray it ever wanted along with the jets and fountain

and doggy meditation classes well the company has extra cash it plans to [Dividends by a company building]

dividend out that cash on a regular basis and just like most companies

it has forecasted earnings three or four years or more into the future and this

dividend payout will be some relatively modest percentage of earnings like if

earnings will be something like 50 million then 70 million then 90 million

x3 years while the dividend might be declared as 25 million dollars a year [Dividend payments appear]

while doing the math here that'd be a 50% of earnings payout ratio in year one

but if they keep the dividend flat and don't raise it well it would just be

then twenty five over seventy or thirty six percent payout in year two and if

they still keep it flat in your three well it would just be a 25 over 90 there

that's a 28 percent payout and in real life odds are good they'd raised their

dividend if their earnings performance was you know this good [Thumbs up appears]

good performance right so what then is the dividend yield here to investors who

own a share of common stock well if the stock was trading for 40 bucks a share

and the dividend was 60 cents than the dividend yield would be 60 over 4000 or

0.6 60 cents there over the 40 bucks or 1.5 percent if the stock ran up to 60

bucks a share and the yield remained 60 cents well than the yield would be one

percent right 60 over 6,000 there yeah and if the stock tanked to be just 10 [Stock plot line crashes]

bucks a share and the dividend was still 60 cents a share the yielded be 6

percent so you can imagine how high dividend yields kind of cushion the

downside of stock like getting 6% it's pretty safe you know people are gonna be

happy to just collect your divvy right all right well that's yield a la

dividend and what should you do with the few bucks you'll make each month from [Man discussing dividends]

your dividends well you might want to stock up on that zombie spray in case

that things go awry [Person spraying zombie with anti zombie spray]