Dividend Yield: How Earning Yield Revolutionizes Your Investment Decisions

When it comes to building a profitable portfolio, many investors focus solely on speculative gains. However, there is an equally lucrative alternative path: dividends. To make the most of this opportunity, it is essential to understand the concept of dividend yield and its relationship with earning yield, two indicators that complement your investment analysis.

Why Is Dividend Yield Essential?

Dividend yield represents the ratio between the payments distributed over the last 12 months and the current stock price. In practice, this indicator shows the percentage of return you would receive annually just from dividends, regardless of price movements.

Contrary to what many think, dividends do not follow a fixed pattern. Each company establishes its own distribution policy. Some pass on their profits semiannually, others annually, and some do so more frequently. This variability requires special attention when analyzing the actual performance of an asset.

The importance of dividend yield goes beyond simple profitability assessment. This indicator reveals a company’s financial health, signaling whether it is in a comfortable position to distribute profits or facing operational difficulties.

Formula and Practical Calculation

The calculation is straightforward: divide the average dividends of the last 12 months by the current stock price and multiply by 100. The result is expressed as a percentage.

Despite its simplicity, there are details that cannot be ignored. Outliers can significantly distort the result. Therefore, observing deviations from the historical pattern is as important as calculating the indicator itself. A high dividend yield in a specific quarter may mask a company facing financial difficulties if not properly contextualized.

Practical Applications in the Market

Dividend yield serves multiple purposes for investors and analysts:

Market Indices: In Brazil, the IDIV B3 index is partially based on the dividend yield of prominent market companies. This index measures the average performance of assets that stand out in terms of investor remuneration.

Indicator of Business Solvency: An attractive dividend yield does not necessarily indicate a healthy company. It is possible that the price has dropped drastically, inflating the indicator. Therefore, it is essential to cross-reference this information with other financial data.

Portfolio Construction: Large investors use dividend yield as a central reference when assembling their portfolios. Along with earning yield and other indicators, it provides a solid basis for strategic decisions.

Finding Historical Dividend Yield Data

Decades ago, accessing historical dividend yield data required consulting dense financial reports. Today, information is widely available:

Official Sources: Publicly traded companies regularly publish reports containing dividend yield data. These documents are usually available on company websites, particularly in investor relations sections.

Stock Exchange Platforms: Most global stock exchanges have digitized their data. For example, NYSE provides free information on dividend yields of thousands of assets.

Brokerages and Analytical Platforms: Financial institutions maintain tools dedicated to asset research, including real-time updated dividend yield calculations.

Factors Affecting Dividend Yield

Understanding the drivers behind variations in dividend yield is crucial:

Internal Dividend Policy: Each organization defines its approach. Some prioritize consistent distribution; others reinvest profits for expansion and return to the market later.

Macroeconomic Environment: During economic contraction periods, companies reduce distributions to strengthen working capital. During expansions, the opposite occurs, with more generous dividends.

Price Fluctuations: The same amount of dividends can result in completely different yields depending on the appreciation or depreciation of the asset.

Market Segmentation: Companies linked to commodities are directly impacted by price fluctuations. Cyclical sectors have more volatile dividend yields than defensive sectors.

Dividend Yield in the Brazilian Market

Brazil offers a well-structured environment for dividend yield analysis. B3 lists indices based on this indicator, and Brazilian legislation requires companies to distribute at least 25% of their profits as dividends, unless otherwise specified in the bylaws.

However, the Brazilian macroeconomic context adds complexity. Frequent economic volatility affects distribution policies. The case of Americanas exemplifies this risk: months before its crisis, the company displayed one of the best dividend yields in the market, a false signal that harmed many investors.

Payout: The Indispensable Complement

Closely linked to dividend yield is payout, the percentage of profit actually distributed. A company with a payout of 110%, as Telefônica once had, signals greater maturity than one with 22%, like Renner in 2020.

Payout reveals corporate maturity. Early-stage operations rarely have high payout ratios. Established companies in leadership positions can distribute larger proportions of profits without compromising operations.

Both indicators, dividend yield and payout, are usually available from the same sources. Using them together provides a more comprehensive view than isolated analysis.

Connecting Dividend Yield with Earning Yield

While dividend yield measures return in dividends, earning yield reflects the total return generated by the company in profits. The difference between the two indicates how much the company reinvests in its growth. This connection is vital for investors seeking to understand whether a company prioritizes immediate remuneration or future expansion.

Conclusion

Evaluating stocks requires multifactor analysis. Dividend yield is a powerful tool in this arsenal but should never be used in isolation. Its combined use with payout, earning yield, and macroeconomic indicators offers a realistic picture of an asset’s financial health.

Beginner investors often make the mistake of overestimating the importance of a single indicator. More experienced investors know that consistency comes from triangulating information. Therefore, stay informed, consult multiple reliable sources, and never cease your financial education.