Falling Prices Push Up Dividend Yields

A well managed company that pays safe dividends is an excellent choice for a long-term dividend-reinvestment portfolio. And when a falling stock market drives down the price of an otherwise good stock, you may be handed a great opportunity to buy the stock at a reduced price and capture a more attractive dividend yield.

The dividend yield is computed by dividing the annual dividend by the current price of the stock. So when the stock price goes down, the dividend yield automatically goes up even though the actual dividend has not increased.

For example, consider a stock that pays a one dollar annual dividend. When the stock price is $20 per share, the dividend yield is five percent. But if the price drops to $17, the dividend yield increases to 5.88 percent. The increase in the yield may not seem like much, but over many years it will significantly increase your total return.

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Posted February 28, 2007.