The 1 Metric I Check Before Buying Any Dividend Stock

There are several details I consider before adding any particular stock to my portfolio. One of them is the ticker's price in relation to its earnings or the amount of revenue that the company is turning into reliable cash every quarter. The organization's past and projected earnings growth are also important starting points for me.

For my income-generating stock holdings, though, there's one crucial measure I consider before any other: their dividend yield. Here's a concise explanation of what dividend yield is, and why you should put it at the top of your list of criteria, too.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

It's not a complicated concept. Dividend-paying companies distribute per-share cash payments to their investors on a regular schedule, usually quarterly.

The dividend yield is just the amount of money that you can expect the company to distribute per share over the course of a year, divided by the price of the stock. Broadly speaking, higher is better.

An example will help illustrate the concept. Let's use beverage company Coca-Cola (NYSE: KO).

Right now, every three months, its shareholders receive payments of $0.53 for each KO share they own. On a full-year basis, assuming that the payout doesn't change, that will come to $2.12 per share. Dividing that amount by the stock's current price of just over $89 per share gives it a dividend yield of just under 2.4%.

That's the forward-looking dividend, meaning it reflects the expected total per-share payments for the coming 12 months, based on the latest payout rate. But plenty of companies adjust their payouts over time. Coca-Cola has now raised its per-share dividend payment for 64 consecutive years , so it's reasonable to assume that management will boost it again early next year.

Companies also show their trailing yields -- based on the total dividends that were distributed during the prior 12 months. In this case, that includes two quarters when its payouts were $0.51 per share and two at $0.53 per share, for a total of $2.08. That gives it a trailing yield closer to 2.3%.

When looking at trailing yields, you'll also want to make sure the yield is based on a payment cadence and size that's likely to be repeated in the future. Some companies occasionally pay "special" dividends or "one-time" bonus dividends. Those are nice surprises, but they aren't reliable, and can temporarily skew a yield to misleading levels.