Matharb

1. What is Dividend Yield

Dividend yield is the annual dividend payment divided by the current share price, expressed as a percentage. It tells you how much income you receive relative to what you paid for the stock.

A higher yield is not always better. A yield that is unusually high often signals that the share price has fallen sharply or that the dividend is at risk of being cut.

2. Yield on Cost Explained

Yield on cost measures your dividend income relative to what you originally paid for the shares, not the current price. It shows how your income stream grows over time as companies raise their dividends.

If you bought a stock at $40 ten years ago that now pays $3 per share annually, your yield on cost is 7.5% even if the current yield based on today's price is only 3%. This is why long-term dividend investors often receive far more income than new buyers of the same stock.

3. What is DRIP

DRIP stands for Dividend Reinvestment Plan. Instead of taking dividends as cash, you automatically reinvest them to buy more shares. This accelerates compounding because you own more shares that pay more dividends that buy even more shares.

4. Dividend Growth Investing

Dividend growth investors focus on companies that consistently raise their dividends year over year rather than those with the highest current yield. A company that grows its dividend at 8% per year doubles its payout every 9 years, which dramatically increases your income stream over time.

Look for companies with a long history of consecutive dividend increases, a sustainable payout ratio below 70%, and strong free cash flow to support future increases.

5. Common Dividend Traps

A dividend trap is a high-yield stock where the dividend is unsustainable and likely to be cut. When a dividend is cut, the share price usually falls sharply, costing you both income and capital.