View Full Version : The mistery of dividends methodology

03-29-09, 03:16 AM
I've realized with surprise that some people on iTulip don not have a clear idea how S&P dividend yields and rates are calculated. In order to correct this deficiency I think it would be interesting to debate the issue, because a correct understanding is essential for assessing the effects of inflation for the real value of our portfolio.

According to S&P documentation (http://www2.standardandpoors.com/spf/pdf/index/SP_Emerging_Markets_Indices_Methodology_Web.pdf?vr egion=us&vlang=en):

Cash Dividend Yield. Standard & Poor’s multiplies the cash dividends per share recorded for each index constituent by the shares outstanding for that constituent in order to arrive at a gross amount of cash dividends paid. It then adds these over a period of 12 months and divides the sum by the end-of-period market capitalization of the index.Basically the sum of dividends over the last year (12 months) are divided with the S&P value of the day of calculation.

Some may be confused about this simple methodology believing the indicated dividend represents some king of "on the spot" or "right now" value:

Indicated dividends are not the same as "trailing 12-month dividends", which I specifically distinguished above. The former - and the ones I cited - are the current dividend annualized. Not a sum over a full year.

According to commonly used English language "indicated dividends" are:

The indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) is the estimated cash (http://www.investorglossary.com/cash.htm) dividends a stock (http://www.investorglossary.com/stock.htm) will pay in the next four quarters, based on what it paid in the most recent period. Stock (http://www.investorglossary.com/stock.htm) tables commonly include the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) to tell investors the annual cash (http://www.investorglossary.com/cash.htm) return they can expect from payouts of earnings (http://www.investorglossary.com/earnings.htm); the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) can then be compared with returns from other securities, like bonds (http://www.investorglossary.com/bonds.htm). In the Wall Street (http://www.investorglossary.com/wall-street.htm) Journal (http://www.investorglossary.com/journal.htm) stock (http://www.investorglossary.com/stock.htm) tables, the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) comes directly after the stock (http://www.investorglossary.com/stock.htm) name; in Barron's tables, the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) is in the last column. While the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) is based on what the stock (http://www.investorglossary.com/stock.htm) paid in the most recent quarter, be aware that companies declare dividend (http://www.investorglossary.com/dividend.htm) rates for varied time-spans. Thus the indicated dividend (http://www.investorglossary.com/indicated-dividend.htm) rate in a stock (http://www.investorglossary.com/stock.htm) table may reflect the declared dividend (http://www.investorglossary.com/dividend.htm) rate for the company's most recent quarterly, six-month, or annual period.
Or in another basic economic knowledge site:

The total amount (http://www.investorwords.com/205/amount.html) of dividends that would be paid (http://www.investorwords.com/3569/paid.html) on a share (http://www.investorwords.com/4525/share.html) of stock (http://www.investorwords.com/4725/stock.html) over the next 12 months (http://www.businessdictionary.com/definition/month.html) if each dividend (http://www.investorwords.com/1509/dividend.html) were the same amount as the most recent dividend.Or the basic definitions of Investopedia:

What Does Indicated Dividend Mean?
The total dividends that would be paid on a share of stock throughout the next year if each dividend is the same amount as the previous payment.
Investopedia explains Indicated Dividend
For example, if General Motors paid a dividend of $0.50 in each of the four quarters last year, the indicated dividend suggests they will pay that same $0.50 in each of the four quarters in the subsequent year.

This is a rough forecasting technique and is usually represented by the letter "e" in stock tables.Some may believe that the exact meaning of the definition is just a technicality, bot if one fails to understand basic markets concepts, there is a danger of wasting a lot of time in creating nice charts that can be as full of meaning as reading the economic future in chicken entrails.

It also can create a sudden jump in blood pressure and lead to premature closing of threads (in anger) when running out of arguments :D

In order to get to a very sophisticated level we have first to have a good understanding of the basics ....