Which is more important dividend yield or total return?

Modified on Tue, 17 Jul 2018 at 08:45 AM

Both dividend yield and total return are terms used to describe the performance of a stock over a certain time period, usually one year, but they reflect different types of performance. Whether equity investors should focus on income generation, which includes dividend yield, or return is a contested topic in the financial world. In truth, the relative importance of each measurement likely depends on your individual circumstances and investment horizon. This does not mean you have to neglect one in favor of the other; it is wiser to take both into consideration before selecting an investment.

The Importance of Dividend Yield

Dividends are the portion of a company's profits that are distributed to shareholders and are usually independent of share price. It is considered a sign of clear financial health and confidence for a company to pay out dividends. Dividend yield is a financial ratio that represents the dividend income per share divided by the price per share. For example, a stock priced at $100 per share that receives a dividend payment of $8 is said to have a yield of 8%.

The Importance of Total Return

Total return, often referred to as simply "return," is a very straightforward representation of how much an investment has actually made for the shareholder. While dividend yield only takes into account actual cash dividends, total return accounts for interest, dividends and increases in share price among other capital gains. On the surface, this appears to provide a more encompassing, and therefore useful, performance metric than dividend yield. However, return is entirely retrospective, and share prices can increase for a huge number of reasons. It is typically more difficult to project future investment performance from the stock's return than its dividend yield.

Which Is More Important?

Importance is relative and specific to each investor. If you only care about identifying which stocks have performed better over a period of time, total return is more important than dividend yield. If you are relying on your investments to provide consistent income, dividend yield is more important. If you have a long-term investment horizon and plan on holding a portfolio for a long time, it makes more sense to focus on total return. However, the evaluation of a company for potential equity investment should never come down to just these two figures; rather, look at the company's balance sheet and income statement, and perform additional research as well.

Source : Investopedia

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