While dividends and annual percentage yield (APY) both provide a return on an initial sum of money, the two terms are very different in nature. The first is used to describe an income payment made to investors while the latter is a return usually given on a deposit account.
Definition of Dividend
Dividends are a portion of a company's earnings that are paid to those that hold stock, known as shareholders. If a company shows profits or earnings for a period, then a dividend is usually declared by the board of directors and distributed to the stockholders on a per-share basis. Since a mutual fund is an investment in several stocks, dividends may also be paid on these shares.
Dividends are usually paid in cash. The investor may choose to accept the payment as income or automatically reinvest the amount by purchasing more shares of the same stock. This is called a dividend reinvestment plan (DRIP). At times, a company will choose to pay its dividends in the form of more shares of stock, known as stock dividends. Dividends are typically paid quarterly.
Definition of Annual Percentage Yield (APY)
The APY is a percentage value representing how much is earned through a deposit or investment while taking into consideration the effect of compounding. Compounding has the potential to produce much greater returns by adding the interest earned in one period to a deposit so that the owner of the account can earn interest on the sum of the two for the following period. This continues throughout the life of the account or until someone withdraws the money.
If a person wants to know what the dividend yield is per share, he need only divide the amount of the annual dividend paid by the market price per share. Market price is the price the share is currently trading at on the stock market. The percentage value returned is the rate of current income earned per dollar invested. So, if dividends are paid quarterly, the sum of the four payments would be divided by the market share price. This is not representative of total yield on a share of stock.
- "Fundamentals of Investing, 11th Edition"; L. Gitman, M. Joehnk and S. Smart; 2011
Christine Aldridge is a financial planner who has been writing articles related to personal finance since 2011. She has bachelor's degrees in political science from North Carolina State University and in accounting from University of Phoenix. Aldridge is completing her Certified Financial Planner designation via New York University.