 Personal Finance PowerPoint Presentation, Forward Dividend Yield. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Forward Dividend Yield, which you can find online. Take a look at the references, resources, continue your research from there. This is by James Chen, updated June 7, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investments, that being fixed income or bonds and equities or typically common stocks. Also, keep in mind your investment tools and strategies. For example, if you're investing for a retirement, for example, you might be using tools such as mutual funds and ETS, and those tools will help to pool together the resources with other investors and investments and help to diversify the portfolio. If you're using that strategy, you might not be doing so much analyzing of individual stocks, but instead trying to find a diversified portfolio, possibly analyzing sectors, possibly looking at indexes. When we're going to be picking and choosing individual stocks, then we're going to be drilling down on those financial statements more likely and doing our ratio analysis on them, which is what we might be looking at here when we think about what is a forward dividend yield. So a forward dividend yield is an estimation of a year's dividend express as a percentage of the current stock price. So the year's projected dividend is measured by taking a stock's most recent actual dividend payment and annualizing it. So remember what dividends are. We're talking about the corporation stock. We own the stock. Therefore, we have an ownership in the company. Companies are a separate legal entity. Their entity of ownership is broken out into equivalent units of stock. Typically, we're talking about publicly traded companies, those corporations that have gone public and are on exchanges, and then the dividends represent the earnings that are being distributed out to the owners or the stockholders. They are similar to draws for a partnership or sole proprietorship in that draws for a partnership, for example, represent earnings that have accumulated, and then we, the partner, take the money out for our own personal use. With a corporation, we can't just have one share take out money that's different than the other share. All the shares have to be the same, and therefore the dividends that are given have to be determined not by one individual shareholder, but instead by the company board of directors and the management. So then the question is, well, how can we predict what the dividends will be in the future? The management might give us some guidance on what that would be, but from a general standpoint, stocks, the corporations don't like to decrease dividends. So you would think that as they increase dividends, they would either be where they currently are or going higher in the future. So if we take the latest dividend that has been given out and try to annualize that dividend, that might be a fairly good way most of the time to determine what we think the dividends will be going forward. So the forward dividend yield is calculated by dividing a year's worth of future dividend payments by a stock's current share price. So now we're thinking about, okay, we're going to figure what we think the dividends are going to be from this point, basically going forward for a year, even though the dividends might be paying out quarterly or something like that, or even monthly or something, we're going to figure out for a year, because that's the typical calculation we do when we compare it then to the price, which is the market price determined by the market for the stock. So understanding a forward dividend yield, for example, if a company pays a Q1 dividend of 25 cents, and you assume the company's dividend will be consistent, the firm will be expected to pay $1 in dividends over the course of the year, because that's going to be 25 cents times four quarters. So if the stock price is $10, the forward dividend yield is 10%. So that's going to be the 1 over 10 or 10% for the dividend yield. The opposite of a forward dividend yield is a trailing dividend yield, which shows that companies actual dividend payments relate relative to its share price over the previous 12 months. So instead of us taking the latest one and going forward, we can go back and notice that these two things could be the same, because it could be that the company didn't change their dividend practice, right? They're going to be consistent on their dividends, but we would expect that if a company is doing well, they're going to try to increase their dividends possibly, and they're going to try not to decrease their dividends. So when they do make an increase, we would expect that they're pretty confident about their position typically, because they don't want to have to reverse that decision in the future generally. So when future dividend payments are not predictable, the trailing dividend yield can be one way to measure value. When future dividend payments are predictable or have been announced, the forward dividend yield is a more accurate tool. In other words, the prior dividend yield could be a good tool. It's accurate, and as what it says, however, it's not giving us as relevant information, I would think is a better way to put it, for what we want to do, which is to determine the value of the stock for the future. So we're trying to be making a decision at the margin, so we're trying to figure out what the dividend yield will be here going forward at the margin. An additional form of dividend yield is indicated yield, or the dividend yield that one share of stock would return based on its current indicated dividend. To calculate indicated yield, multiply the most recent dividend issued by the number of annual dividend payments, the indicated dividend divide the product by the most current share price. So we got the indicated yield is going to be the most recent dividend times the dividend payments each year divided by the stock price, the market price. For example, if a stock trading at $100 has a most recent quarterly dividend of 50 cents, the indicated yield would be the 50 cents times 4 divided by 100. And again, the concept here being we're trying to make the decision at the margin basically going forward from this time and putting it in terms of a year, because that's how we usually like to be basically comparing things to the stock price. So here's an image of just basically the share price, which is determined by the market, the dividends being paid out on a quarterly basis. So we've got the four dividends, the dividend yield equals the annual dividends divided by the share price. Annual dividends would be all of the four quarter dividends note that the company doesn't have to give dividends to quarterly. They can choose to give dividends out whenever they want, but it's fairly standard to give to see like quarterly dividends forward dividend yields and corporate dividend policy. A company's board of directors determines the dividend policy of the company. In general, more mutual and established companies issue dividends while younger rapidly growing firms often choose to put any excess profits back into the company for research development and expansion. So again, we as the shareholders don't determine what the dividends will be as we would kind of determine if we were like a partnership or something like that, because the individual shares have to be the same in nature. We can't have like we could have one partner drawing out more or less than another partner, but we can't really have that on the stocks because the stocks have to all be uniform. We can as shareholders vote for the board of directors, for example, and pressure them to give us more dividends. But as individual investors, we usually don't have that much influence, so we're kind of subject to what the company is going to determine the dividends to be. Common types of dividend policies include the stable dividend policy in which the company issues dividends when earnings are up or down. The goal of a stable dividend policy is to align with the firm's goal for long-term growth instead of its quarterly earnings volatility. With a constant dividend policy, a company issues a dividend each year based on the percent of the company's earnings. So we could of course look at what the company is telling us in terms of how they're going to structure their dividends. Again, in general, they kind of like dividends going up and not down, but if consistency is the key. So if they basically say, hey, we're going to have our dividends be consistent, tied to say income in some way, then we can use... Obviously that would be relevant information to help us to predict what the dividends will be in the future based on. We'd have to then predict what their revenue is going to be in the future. With a constant dividend, investors experience the full volatility of company earnings. Finally, with a residual dividend policy, a company pays out any earnings after it pays for its own capital expenditures and working capital needs. So the company might say, hey, look, I'm going to pay for what we need to get done in the company. And this makes sense because the idea is that the company is trying to give the maximum value to the owners, the investors, the stockholders. And how do they do that? Well, they're going to reinvest it if they can because we would think that the reinvestment would earn them a higher return than if they gave us the money. So if you can reinvest it by equipment, by capital and stuff like that, then earn a return on it, then do it. But if you've already bought all that stuff and then the added money shouldn't just be sitting on the books, you should give it to the owners. So the owners can invest it somewhere else where it's earning money. So what is a good dividend yield? Generally, a dividend yield between 2% and 6% is considered a good dividend yield. Yields above 6% are considered to be higher risk stocks, which, depending on the investor's risk tolerance, may be a risky investment not worth exploring. As of March 10, 2022, the average dividend yield for the S&P 500 since inception is 4.29%, and its current dividend yield is 1.42%. So what is a good PE price earnings ratio? The higher the PE price earnings ratio means the more willing investors are to pay a higher share price now for a stock with the expectation of growth in the future. So the average PE price earnings ratio of the S&P 500 since inception is 15.97%, while its current PE ratio is 24.29%. Does TELSA pay dividends? No, TELSA has not and does not intend on paying dividends that company believes in keeping its retained earnings to fund growth of the company. So this is TELSA is a classic kind of example of types of companies that needs a lot of capital investment. So obviously as TELSA is growing, then as long as they are able to take the money that they're getting and invested in factories and whatnot so that they can generate a higher return on that investment, then the money that we could have if we invested somewhere else, people are willing to invest in TELSA because they're not doing it to get the dividends in that case. They're doing it to get a growth in the value of that particular stock and so that's going to be of course the trade off. Now there will probably be some point in the future if TELSA becomes well established as basically the manufacturing company of cars or something like that, then that they don't need to buy more plants or build more plants or something like that and at that point in time then they'll be at the top of their growth cycle. They might then be in a position to give more steady dividends so we'll see in the future.