Dividend yield: It's worth figuring

A COMPANY'S "dividend yield" expresses the relationship of a stock's price and the amount of its annual dividend. It's a number that investors need to understand.

Consider Pfizer Inc. It's trading around $25 per share, paying out 22 cents per quarter (88 cents a year) as a dividend. Take $0.88, divide it by $25 and get 0.035. Multiply that by 100, and you have a dividend yield of 3.5 percent. If you pay $25 for a share of Pfizer, you'll earn 3.5 percent per year, just from dividends alone.

Dividends of healthy companies tend to increase over time, delivering additional value to shareholders. Companies rarely decrease or eliminate dividends, because that would make investors unhappy. Like many companies, though, Pfizer got whacked in the recent recession, and it halved its payout in 2009. Pfizer has been hiking it since then, and has, overall, doubled its dividend over the last 11 years.

A dividend will hold steady for months or years. But the yield usually fluctuates daily, because it's tied to the stock's price. As a stock price rises, the yield falls, and vice versa. If Pfizer shares, for example, suddenly doubled in price to $50, the yield would be halved.