Dividend Yield as a Valuation Check

For steady dividend payers, the yield can hint at whether a stock is cheap or expensive compared with its own history. But a very high yield is often a warning, not a bargain. Here is how to use yield wisely.

Yield moves opposite to price

Dividend yield is the yearly dividend divided by the share price. If a company pays $2 a year and the stock is $50, the yield is 4%. If the price falls to $40 with the same dividend, the yield rises to 5%. For mature companies that raise dividends steadily, a yield well above its usual range can mean the stock is out of favor, and possibly cheap.

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