The dividend, or dividend rate, is the total income an investor receives from a stock or another dividend-yielding asset during the fiscal year. However, stock dividends are often quoted using another figure: the dividend yield. The dividend yield is calculated by taking the total annual dividends and dividing that figure by the current share price.
How Dividend Rate Works
Dividend rates are expressed as an actual dollar amount, which is the amount per share an investor receives when the dividend is paid. As an example, consider if stock for Company X pays an annual dividend of $4 per share in four quarterly payments of $1. The dividend rates are $1 quarterly and $4 annually. Quarterly dividends are the most common for U.S-based dividend-paying companies. However, some companies will distribute dividends annually, semiannually, or monthly.
When the dividend rate is quoted as a dollar amount per share, it may also be referred to as dividend per share, or DPS. You can usually see the accounting history of a company's dividend payments in the investor relations portion of its website.
There are other kinds of dividends as well. Some companies choose to pay out dividends in the form of extra stock or even property. Companies may do this when they decide they want to pay out dividends but need to hold on to some extra cash for liquidity or expansion.
How Dividend Yield Works
By contrast, the dividend yield is quoted as a percentage rather than a dollar amount. You are more likely to see the dividend yield quoted than the dividend rate. The initial reason for this makes sense; a company that pays out dividends at a higher percentage of its share price is offering a greater return for its shareholders' investments. It is better to receive $3 in dividends on a $50 stock than $5 in dividends on a $100 stock because the investor could ostensibly just purchase two of the $50 shares and receive $6 in dividends that way. The dividend yield tells you the most efficient way to earn a return.
Unfortunately, the calculation for dividend yield presents some problems. Dividend yields can vary wildly, so the calculated yield may actually have little bearing on what the future rate of return (ROR) will be. Additionally, dividend yields are inversely related to the share price; a rise in yield may be a bad thing if it only occurs because the company's stock price is plummeting.