It’s my annual Taxes from A to Z series! If you’re wondering how to figure basis for cryptocurrency or whether you can claim home office expenses during COVID, you won’t want to miss a single letter.

Y is for Yield Rate.

If you own stock, you may receive a dividend (not all stocks pay dividends). Whenever your stock pays out a dividend, that dividend is typically taxable on your Form 1040. The amount of the dividend is usually called the dividend rate and is quoted in currency, like U.S. dollars.

We use dividends – as determined by dividend rates – on our tax forms because they’re easy to transfer (for example, $51.23 for the year in dividends goes straight to Part II on Schedule B). However, stock dividends can also be quoted in terms of yield. A dividend yield is typically reported as a percentage.

(Yes, we’re about to do math).

The yield (or yield rate) represents the ratio of a dividend compared to the current share price for a stock. Or put another way: (annual dividend/share price) * 100

So, let’s take that $51.23 from before. Let’s assume the share price was $1,000. The math looks like: $51.23/$1000 * 100 = 5.123%

If the dividend goes up, but the share price remains the same, your yield is higher. That’s good.

But if your dividend goes up, that doesn’t always mean the stock yield is better. What if your dividend increased by a penny, but the share price doubled? More money for you? Yes. More efficient overall? No.

Yield rates are supposed to tell you how efficient your return might be, but you can already see the potential flaws, right? Let’s say the dividend remains the same but the share price drops. Higher yield? Yes. But more efficient? Not necessarily. If your share price is dropping, that likely also means that the value of your investment is falling, and typically that’s not a good thing.

So does this mean you should ignore the yield? Definitely not. Looking at the yield rate can give you a sense of the potential for a dividend payout from a company. Just don’t get so caught up in the yield rates (which, as we noted just above, have their flaws) that you lose sight of other important considerations like historical performance and market conditions.

You can find the rest of the series here:

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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