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A cursory search with the title of the question would most likely point a person towards looking at Div. yield or P/E ratio. The closest I term I can find to what I describe is Div. per share (DPS).

So say I'm looking to invest in identical companies, foo corp and bar corp who pay quarterly dividends. Let's say they both pay a dividend of 1$/share, but foo corp trades at 10$/share and bar corp trades at 100$/share.

My though process at this point is that given individual stock price, I would buy foo corp b/c I can buy more shares of it, thus optimizing the amount of money I make. Now if were to ignore all other factors of investing in a stock and wanted a quantitative value for measuring the "payout efficiency" it would end up being:

Share Price/Declared or Latest Dividend = Payout Efficiency

I cannot find any term for something like this and major sites and lists like Dividend.com or Wall Street Journal don't allow me to sort by a number like this.


So I suppose the real questions are:

  1. Would this be an acceptable method for finding a stock with the highest possible payout?
  2. Is my underlying assumption that the per share price effects the payout incorrect?

Seeing as my "new formula" is a rather simple solution for the problem, but is not implemented would lead me to believe that I have some incorrect assumption about dividends.

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What you're referring to is the yield. The issue with these sorts of calculations is that the dividend isn't guaranteed until it's declared. It may have paid the quarterly dividend like clockwork for the last decade, that does not guarantee it will pay this quarter.

Regarding question number 2. Yield is generally an after the fact calculation. Dividends are paid out of current or retained earnings. If the company becomes hot and the stock price doubles, but earnings are relatively similar, the dividend will not be doubled to maintain the prior yield; the yield will instead be halved because the dividend per share was made more expensive to attain due to the increased share price.

As for the calculation, obviously your yield will likely vary from the yield published on services like Google and Yahoo finance. The variation is strictly based on the price you paid for the share. Dividend per share is a declared amount. Assuming a $10 share paying a quarterly dividend of $0.25 your yield is:

 (0.25 * 4) / 10
 Divided yield: 10%

Now figure that you paid $8.75 for the share.

 (0.25 * 4) / 8.75
 Dividend yield: 11.4%

Now the way dividends are allocated to shareholders depends on dates published when the dividend is declared. The day you purchase the share, the day your transaction clears etc are all vital to being paid a particular dividend. Here's a link to the SEC with related information:

https://www.sec.gov/answers/dividen.htm

I suppose it goes without saying but, historical dividend payments should not be your sole evaluation criteria. Personally, I would be extremely wary of a company paying a 40% dividend ($1 quarterly dividend on a $10 stock), it's very possible that in your example bar corp is a more sound investment.

Additionally, this has really nothing to do with P/E (price/earnings) ratios.

  • It has a bit to do with P/E ratio, because dividend cover is important when assessing high yielding shares, and that's based on earnings. – Mike Scott Jun 30 '16 at 7:07
  • Sure, you could consider the amount of earnings per share being paid as a dividend; though that won't impact the yield, but would offer other insights. You can (and should) consider all sorts of metrics and ratios when evaluating an investment. – quid Jun 30 '16 at 7:13
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The term you're looking for is yield (though it's defined the other way around from your "payout efficiency", as dividend / share price, which makes no substantive difference). You're simply saying that you want to buy high-yield shares, which is a common investment strategy. But you have to consider that often a high-yielding share has a reason for the high yield. You probably don't want to buy shares in a company whose current yield is 10% but will go into liquidation next year.

  • So is the yield you're referring to different than dividend yield? – Bennett Yeo Jun 30 '16 at 6:24
  • No, it's the dividend yield. – Mike Scott Jun 30 '16 at 6:24
  • A liquidation generates a gain/loss, not dividend. This is very different for tax purposes. See irs.gov/irm/part4/irm_04-011-007.html section 4.11.7.5 – B Chin Apr 5 '17 at 7:03

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