How to Calculate Dividend Yields: A Step-by-Step Guide for Investors

Dividend stocks are at the heart of many retirement portfolios. After all, what’s better than getting paid to hold on to your investments? Yet, as straightforward as dividend income may seem, understanding how to calculate dividend yields—how much bang you’re getting for your buck—can be a bit more challenging to grasp.

Dividend yields are simply a way of looking at the income you generate from your portfolio relative to their price. While they provide a helpful snapshot for comparing investments, they offer little value in assessing long-term income potential. That’s where terms like “yield-on-cost” come into play, helping you plan over decades.

In this guide, we’ll break down the math in a clear, step-by-step way, touching on different payment schedules and showing you exactly how to factor in those rising dividends that make a long-term investment so rewarding. Plus, you’ll see how a good dividend calculator can help you crunch these numbers faster and provide deeper insights.

How to Calculate Dividend Yields

Dividend yields make it easy to compare dividend stocks with other income sources like bonds. They provide a snapshot of how much income you’re earning from each dollar you invest in a stock. Using this information, it’s easy to compare a dividend stock’s yield with a bond’s yield to see what offers the most income for retirement.

Here’s how to calculate a stock’s dividend yield:

Dividend Yield = Annual Dividend per Share / Stock Price per Share

Let’s break down each step:

  1. Determine the Annual Dividend per Share – Find the stock’s annual dividend by multiplying their dividend amount by the payment schedule. For instance, if a stock pays a quarterly $0.50 dividend, you would multiply $0.50 by four to get the annual dividend since there are four quarters in a year ($2.00). However, some stocks may pay an annual (x1) or monthly dividend (x12), too.
  2. Determine the Current Stock Price per Share – Check any financial website or your brokerage to get the company’s current price per share. For example, you might find the stock trades for $40.00 per share.
  3. Apply the Dividend Formula – Plug the two numbers above into the dividend yield formula to get the stock’s dividend yield.

Using the formula we defined earlier:

Dividend Yield = 2.00 / 40.00 = 5%

So, in this case, the stock’s dividend yield is 5%. This means that every $100 you invest in the stock, you’re earning $5 in dividend income per year. But, if a bond offers a 7% yield, does that make it a better option for income? Not necessarily. To understand why, we need to explore the concept of “yield-on-cost.”

What is Yield-on-Cost?

Dividend yields provide a snapshot of how much you’ll earn this year based on the current price of the stock—but it doesn’t tell you anything about future income. This concept is best illustrated using a different metric known as yield-on-cost.

Consider Warren Buffett’s investment in Coca-Cola. 

Coca-Cola’s current dividend yield hovers around three percent and has for years, which makes it somewhat lackluster for income investors. That is, until you consider that the dividend has grown more than 240% and the stock price has appreciated by about 160% since 1994. That’s a nearly 60% yield on the Oracle of Omaha’s original investment!

A simple tweak to the dividend yield formula offers these insights:

Yield on Cost = Annual Dividend per Share / Initial Purchase Price per Share

For example, suppose you bought a stock a few years ago for $20 per share. At the time, the company paid an annual dividend of $0.80 per share, which translates to a 4% dividend yield. But, over the years, the company increased its dividend and now pays $1.20 per share each year. The result is a 6% yield-on-cost.

Using the formula:

Yield on Cost = 1.20 / 20.00 = 6%

The calculation can become a bit more complex if you’ve purchased the stock on a regular basis over the year. For example, if you made purchases each year at different prices, you must determine the average cost basis and use that as the purchase price per share. The good news is that dividend calculators can help—more on that later!

Why Dividends Aren’t Set & Forget

Coca-Cola’s three percent yield is less than many real estate investment trusts (REITs) or energy master limited partnerships (MLPs). And the stock may not have the allure of an artificial intelligence pioneer or the next big consumer products category. But that’s why we use yield-on-cost rather than dividend yields alone.

If a company doesn’t increase its dividend over time, the yield on cost will stagnate, turning a would-be 60% return back to a 3% return. Therefore, it’s crucial to find companies increasing their dividends over time to maximize your yield-on-cost. This usually means those with stable earnings, robust cash flow, and a long dividend track record. 

Interestingly, companies with the highest dividend yields typically lag the broader dividend paying universe. Some of these companies are “bond proxies” in real estate or utilities, which don’t typically increase dividends and have limited equity market participation. Meanwhile, other companies may need to cut dividends because they’re unsustainable.

And finally, most investors recognize the importance of diversification. If you hold a portfolio of dividend-paying stocks concentrated in the energy sector, you risk a sharp decline in your portfolio’s value if oil prices fall or a war breaks out. Proper diversification can help protect your portfolio from any single threat.

The good news is that dividend screeners can help you uncover the best opportunities and help you look beyond the headline dividend yield.

Dividend Calculators & Screeners

You’re probably starting to appreciate the value of a good dividend calculator and screener. After all, calculating yield-on-cost with multiple transactions and stocks would require a large spreadsheet while finding good dividend investments requires a lot more in-depth research than looking at headline dividend yields.

That’s where tools like TrackYourDividends can help!

TrackYourDividends’ free dividend calculator can help you project your future income based on your starting principal, monthly contributions, average annual dividend, average dividend growth rate, average share price growth, and number of years.

Calculate Dividend Yields

TrackYourDividends offers a free dividend calculator. Source: TrackYourDividends

But beyond this simple tool, TrackYourDividends offers powerful screening, tracking, and analysis capabilities at an affordable price. You can connect your brokerage account to see your real-time dividend yield, yield-on-cost, and annual income, as well as project your portfolio’s future income potential and ensure proper diversification.

TrackYourDividends also offers one of the most powerful dividend screeners available. Rather than looking at just yield, you can access the proprietary dividend safety score and see lists of top-quality dividend stocks. These tools make it easy to find dividend-paying companies like Coca-Cola to help grow your yield-on-cost over time.

Get started today for free!

The Bottom Line

Dividend stocks are at the heart of many retirement portfolios, but many investors only have a superficial understanding of how to build an effective income portfolio. Using concepts like yield-on-cost, it’s easier to understand the importance of quality and long-term dividend growth to maximize future income potential.

Tools like TrackYourDividends can help analyze your current portfolio, project your future income levels, and make any necessary adjustments to reach your financial goals—all without breaking the bank. Get started today for free!