Dividend Yield: The One Metric That Matters Most

When investing in dividend stocks, one crucial metric stands out among others: dividend yield. Dividend-paying companies distribute cash to shareholders on a regular schedule, usually quarterly. The dividend yield is calculated by dividing the expected annual per-share payout by the stock's price.

An example illustrates this concept using Coca-Cola (NYSE: KO). Shareholders receive $0.53 every three months, totaling $2.12 per share annually. At its current price of just over $89 per share, the dividend yield is approximately 2.4%. This forward-looking figure reflects expected payouts based on the latest rate.

Companies like Coca-Cola have a history of adjusting their payouts over time. In this case, management has increased dividends for 64 consecutive years, making it reasonable to assume future boosts.

The trailing yield is another essential metric, calculated from total dividends distributed in the prior year. For Coca-Cola, this amounts to $2.08 per share and a trailing yield of around 2.3%. However, be cautious when evaluating trailing yields, as some companies pay special or one-time bonuses that can skew results.

Before investing in dividend stocks, it's essential to consider the company's ability to maintain its payouts. This involves comparing per-share profits with per-share dividends, ensuring the former exceeds the latter by a significant margin. In Coca-Cola's case, total per-share profits for the past four quarters were $3.33, comfortably covering its per-share dividend payout of $2.08.