Dividend yield and the worth of an investment

The dividend yield is another figure that can be used to help to assess what the worth of a share is in terms of a potential investment.

You do need to have some guesswork here: for instance you need to consider if the company is going to continue paying the dividend, and then you need to guess whether it will continue paying it at the same level, and potentially of course even increase it.

To help you do this you can look at historical data. As we all know past performance is no guide to future performance, but that said if the company has been paying the same percentage dividend come what may for 20 years then it would at least be very reasonable to inductively reason (although potentially still a chance of being wrong) that will continue to be the case going forwards.

There is another useful figure that comes into play here and it is called dividend cover. This does what it says - it measures how able the company would be to continue paying thhe dividend if the profits fall for whatever reason. With this figure, calculated simply by dividing earnings per share by dividends by share, the higher the value the better.

As a rule of thumb, if the result of performing the sum above is below around 1.5 then that would be seen as fairly risky, whilst 2 or above is a lot safer.

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