A:

Both dividend yield and total return are terms used to describe the performance of a stock over a certain time period (usually one year) but they reflect different types of performance. Whether equity investors should focus on income generation, which includes dividend yield, or return is a contested topic in the financial world. In truth, the relative importance of each measurement likely depends on your individual circumstances and investment horizon. This does not mean you have to neglect one in favor of the other; it is wiser to take both into consideration before selecting an investment.

The Importance of Dividend Yield

Dividends are the portion of a company's profits that are distributed to shareholders. It is considered a sign of clear financial health and confidence for a company to pay out dividends, which are usually independent of share price. The dividend yield is a financial ratio that represents the dividend income per share divided by the price per share. For example, a stock priced at $100 per share that receives a dividend payment of $8 is said to have a yield of 8%.

For long-term investors, dividends can be very powerful, because they can be reinvested and used to purchase more shares, meaning the investor does not have to commit more of his or her own resources to increase his or her equity holdings. Other investors rely on yields to produce a stream of income from their investments. Though not quite as reliable as fixed-income investments such as bonds, dividend-producing stocks can be quite valuable in this way.

Yield, however, can be misleading. Some companies continue to pay yields even when they are operating at a short-term loss, while other companies pay out yields too aggressively and fail to reinvest enough profit to sustain operations down the road.

The Importance of Total Return

Total return, often referred to as simply "return," is a very straightforward representation of how much an investment has actually made for the shareholder. While the dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends and increases in share price among other capital gains. On the surface, this appears to provide a more encompassing, and therefore useful, performance metric than the dividend yield. However, return is entirely retrospective, and share prices can increase for a huge number of reasons. It is typically more difficult to project future investment performance from the stock's return than from its dividend yield.

Which Is More Important?

Importance is relative and specific to each investor. If you only care about identifying which stocks have performed better over a period of time, total return is more important than the dividend yield. If you are relying on your investments to provide consistent income, the dividend yield is more important. If you have a long-term investment horizon and plan on holding a portfolio for a long time, it makes more sense to focus on total return. However, the evaluation of a company for potential equity investment should never come down to just these two figures; rather, look at the company's balance sheet and income statement, and perform additional research as well.

RELATED FAQS
  1. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
  2. What is the difference between yield and return?

    Return is the financial gain or loss on an investment. Yield measures the income, such as interest and dividends, from an ... Read Answer >>
  3. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
Related Articles
  1. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  2. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  3. Financial Advisor

    4 Dividend ETFs to Help Fund Your Retirement

    Investing in stocks that pay out dividends can be a smart way to establish a reliable income stream in retirement. Here are four low-fee dividend ETFs.
  4. Investing

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
  5. Investing

    A History of the S&P 500 Dividend Yield

    Find out why the dividend yield for the S&P 500 Index remains historically low, and what dividend yields used to look like before the Internet Age.
  6. Investing

    5 Dividend Growth Stocks Posed For Higher Dividends (V, NKE)

    Learn about five companies that have a strong history of consistently growing their dividend payments and have the potential to continue doing so in the future.
  7. Retirement

    High Yield Stocks Can Hurt Your Retirement Nest Egg

    High yield stocks can give you a handsome return, but for retirement investors the risk far outweighs the reward.
RELATED TERMS
  1. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  2. Yield

    Yield is the return a company gives back to investors for investing ...
  3. Dividend Frequency

    Dividend frequency is how often a dividend is paid by an individual ...
  4. Cash Dividend

    Cash dividend is the money paid to stockholders normally as a ...
  5. Yield On Cost (YOC)

    Yield on Cost (YOC) is the annual dividend rate of a security ...
  6. Income Investment Company

    An income investment company manages portfolios of income-generating ...
Trading Center