Selecting Stocks to Buy with the Dividend Yield

Each stock that pays a dividend has a historical dividend yield – an average dividend yield that it has paid out on a stock over time. The thinking is simply that if the current dividend yield on a stock is below the historical dividend yield, then the stock might be priced expensive. If the current dividend yield is above the historical dividend yield, the stock may be priced a lower than average and this may be a good time to consider a purchase.

Note: Keep in mind, just because the current dividend yield is higher, does not mean it is necessarily a good time to buy. You need to do your research to understand why this is – did something bad happen (scandal, really bad earnings) or is the market just pricing it a bit cheaper than usual.

Lets take a look at example at two different stocks:

ABC Company
Ticker: ABC
Historical Dividend Yield: 4.3%
Current Dividend Yield: 2.5%

XYZ Company
Ticker: XYZ
Historical Dividend Yield: 3.4%
Current Dividend Yield: 4.6%

Which one do you think is the better buy (assuming all other fundamentals check out alright)? If you guessed XYZ Company then you are right. Historically, the market has provided XYZ with a dividend yield of 3.4% but today Mr. Market has assigned it a dividend yield of 4.6%. Our hope is that things return to normal and the market adjusts itself back to the average (which it tends to do) and we can enjoy a nice run up in price while collecting a higher yield on our purchase. Not a bad situation if you can find it.

So where do you find this information. This can be a bit tricky but it is often best to grab the annual report for the companies and find the average share price and dividend for the year and calculate it out. It may take some time, but once you get it all set up for the companies you want to follow it is easy to maintain.