Checkpoint 2 of 3

Understanding Dividend Metrics

5 min

Several key metrics help you evaluate dividend stocks. Knowing what to look for separates sustainable dividends from risky ones.

Dividend Yield

Dividend yield is the annual dividend divided by the stock price, expressed as a percentage. A $100 stock paying $4/year has a 4% yield. Higher yields aren't always better—extremely high yields (8%+) can signal trouble.

Dividend Yield = (Annual Dividend / Stock Price) × 100

Example:

($4 / $100) × 100 = 4% yield

Payout Ratio

The payout ratio shows what percentage of earnings a company pays as dividends. A 60% payout ratio means the company pays 60% of profits as dividends and retains 40%. Lower is safer—leaves room for dividend growth and economic downturns. Over 100% is unsustainable.

Dividend Growth Rate

How much has the dividend increased over time? Companies that consistently raise dividends (dividend aristocrats) often outperform. A 5-year dividend growth rate of 10% annually shows strong commitment to rewarding shareholders.

Good Dividend Stock

2-4% yield
40-60% payout ratio
5%+ annual growth

Risky Dividend Stock

8%+ yield
90%+ payout ratio
Declining or flat growth

Key Takeaways

Dividend yield = annual dividend ÷ stock price
Payout ratio under 70% is generally sustainable
Look for consistent dividend growth, not just high yields

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