There are two ways to make money out of shares. The most obvious is when you sell a stock for more than you buy it for. That’s called capital gains, and that garners most people’s attention. This usually occurs when the Australian stock market is in a bull market.

The other way of making money is less glamorous, but just as important. When you own shares in a company, you literally own a small slice of the company. Typically, when a company makes a profit, it distributes the money to its owners. You, as a shareholder, are one of the owners (admittedly usually a small one) and this money is called a ‘dividend’. This is an important point to consider when buying shares.

Now almost all of you will know what a dividend is, but not everyone knows about the dividend yield. The dividend yield is simply the total dividends for the year expressed as a percentage of the share price.

Dividend yield = annual dividends (in cents) / share price (in cents)

For example if you put $1000 into the bank, and you receive $60 in interest for the year, then the return or ‘yield’ is 6% ($60/$1000). The same goes for dividends. If you invest $10,000 in a share, and you receive $300 of dividends, that’s equal to a yield of 3%.

One of the high dividend stock picks were Macquarie Infrastructure (MIG) and Tabcorp (TAH) with a dividend yield of 16.81% and 9.23% respectively. Usually, Blue Chip Stocks provide a fairly high dividend yield.

A company can pay virtually whatever dividend it wants, from nothing up to a maximum of around 10%. Most companies pay between 2% and 5% and the average across the entire market is currently around 3.7%.

For example in the Australian Stock Market, Amcor (AMC) is a fairly high yield stock which had a dividend yield of 5.8%. It went ex-dividend on 2 March 2010 which does not entitle a new investor to the dividend declared if they purchased the share on the ex-dividend date.

Broadly, companies fall into two categories – growth and income. Growth stocks are companies that are expanding and don’t pay out much of their profits in dividends, because they need the money to grow. Mining stocks often pay out little in dividends.

Income stocks are more stable companies that pay out regular and predictable dividends. Banking stocks and property trusts generally pay a high dividend yield of around 5% or higher.

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