The Average Homeowner Now Has $207,000 in Tappable Equity: The Question Is How Do You Tap It?

While prospective home buyers continue to grapple with high mortgage rates and limited supply, existing owners are getting richer.

A new report from Black Knight revealed that the average American homeowner is sitting on more than $207,000 in tappable equity.

The phrase “tappable equity” means an amount that leaves a 20% equity buffer in place, aka 80% loan-to-value (LTV).

This is generally what banks and mortgage lenders will allow homeowners to borrow to ensure they have some skin in the game.

The question though is how do you tap into that equity, especially in a rising rate environment?

Does a Cash Out Refinance Still Make Sense?

tappable equity

  • Mortgage holders withdrew more than $75 billion in the first quarter of 2022 via cash out refinances
  • The cash out refinance share jumped to 75% during Q1 as rate/term refis waned
  • Early Q2 data suggests higher mortgage rates will dampen demand going forward

As noted, American homeowners are sitting on a staggering amount of available home equity.

At last glance, it was over $11 trillion, or roughly $207,000 per mortgage holder.

That figure is up from $127,000 at the start of the pandemic, and more than 2X the levels seen back in 2006 during the prior market height.

Here’s the problem though – mortgage rates have also basically doubled since the start of the pandemic, making a refinance a tough sell.

Still, cash out refinance volume doubled over the past 12 months, with such loans accounting for 75% of all refinances in the first quarter of 2022.

That was up from a 61% share in the fourth quarter of 2021 and 36% from a year earlier.

Of course, refinance lending overall was down 54% in the first quarter from the same period a year earlier, thanks to an 80% drop in rate/term refis.

Meanwhile, cash-out refis were off just 4% on an annual basis. However, the number of transactions fell for the second consecutive quarter, and growth in overall equity withdrawals slowed.

Ultimately, a cash out refinance won’t make sense for a lot of homeowners if their existing mortgage rate is in the 2-3% range.

Sure, it’s nice to tap into that equity, but not if you have to replace your first mortgage rate with a 5-6% interest rate.

What About a Second Mortgage, Such as a HELOC or Home Equity Loan?

The alternative a lot of borrowers are looking at now that mortgage rates are no longer on sale is a second mortgage.

Banks and mortgage lenders are also ramping up their offerings to account for this trend.

There are basically two main options available to homeowners; a home equity line of credit (HELOC) and a fixed-rate closed second.

The HELOC works similarly to a credit card in that you can borrow only what you need, pay it back over time, or simply keep it open for a rainy day.

The downside to the HELOC is that it features an adjustable interest rate, which is tied to the prime rate.

Whenever the Fed moves rates higher, the prime rate will go up by the same amount.

The Fed is expected to raise rates .50% in June and July to tame inflation. This will translate to a 1% increase in HELOC rates.

Of course, they might be done after that, and if the economy goes into a recession, they could turn around and lower rates too.

So HELOCs might have a somewhat telegraphed price assumption over the next year or so.

If you are risk averse, there’s the home equity loan, which allows you to borrow the full amount at closing.

You get a lump sum of your equity, but no additional draws in the future. The upside is that the interest rate is typically fixed.

The downside is that the interest rate is likely higher than a HELOC to account for the fixed rate advantage.

And as noted, you borrow the full amount, whether you need it or not. This means paying interest on the full amount.

Still, either option may be advantageous to a cash out refinance, which disrupts your first mortgage.

Use a Home Equity Sharing Company?

There are also so-called “home equity sharing companies” where you trade a portion of future home price appreciation for cash today.

One such company in this emerging industry is Point, which allows you to get payment-free cash.

However, you do give up a share of your (hopefully) rising property value in exchange, and they charge an upfront transaction fee that is deducted from your proceeds.

The cost of borrowing then depends upon when you pay it back, via home sale, refinance, or simply buying them out. And how much your property appreciates during that time period.

There was a similar company called Noah, which paused applications a while back. It’s unclear if they’ll resume lending at some point.

Other names in the nascent field include Hometap, Unison, and Unlock.

Personally, I don’t love the idea of giving up future gains, especially when they’re unknown. But it’s an option nonetheless.

Seniors Can Consider a Reverse Mortgage to Tap Available Home Equity

One final option to consider, assuming you’re a senior (62+) is the reverse mortgage.

Not only does it allow you to tap your available home equity, but it also comes with no monthly payments.

This is obviously a plus if you’re retired or close to retirement and want to keep your home, but need cash.

It may also be easier to qualify for a reverse mortgage versus a traditional mortgage, especially for fixed income borrowers.

Like the options discussed above, it’s possible to take out a reverse mortgage as a line of credit, or opt for a lump sum payout.

Additionally, you can opt for an adjustable-rate mortgage or a fixed-rate mortgage. So there’s lots to consider.

There are pros and cons to all those options, and which one you choose will be based on your individual needs and risk appetite.

Reverse mortgages can be more complicated than a traditional mortgage, so shopping around could come with the added benefit of education.

It may also allow you to see more loan program options and scenarios to choose from, including proprietary offerings.

To sum things up, it’s not nearly as cheap as it was just a few months ago to tap your home’s equity, but there are still opportunities on the table.

Take the time to educate yourself about each to determine which, if any, is best for you.

Source: thetruthaboutmortgage.com

The Average Homeowner Now Has $207,000 in Tappable Equity: The Question Is How Do You Tap It?

While prospective home buyers continue to grapple with high mortgage rates and limited supply, existing owners are getting richer.

A new report from Black Knight revealed that the average American homeowner is sitting on more than $207,000 in tappable equity.

The phrase “tappable equity” means an amount that leaves a 20% equity buffer in place, aka 80% loan-to-value (LTV).

This is generally what banks and mortgage lenders will allow homeowners to borrow to ensure they have some skin in the game.

The question though is how do you tap into that equity, especially in a rising rate environment?

Does a Cash Out Refinance Still Make Sense?

tappable equity

  • Mortgage holders withdrew more than $75 billion in the first quarter of 2022 via cash out refinances
  • The cash out refinance share jumped to 75% during Q1 as rate/term refis waned
  • Early Q2 data suggests higher mortgage rates will dampen demand going forward

As noted, American homeowners are sitting on a staggering amount of available home equity.

At last glance, it was over $11 trillion, or roughly $207,000 per mortgage holder.

That figure is up from $127,000 at the start of the pandemic, and more than 2X the levels seen back in 2006 during the prior market height.

Here’s the problem though – mortgage rates have also basically doubled since the start of the pandemic, making a refinance a tough sell.

Still, cash out refinance volume doubled over the past 12 months, with such loans accounting for 75% of all refinances in the first quarter of 2022.

That was up from a 61% share in the fourth quarter of 2021 and 36% from a year earlier.

Of course, refinance lending overall was down 54% in the first quarter from the same period a year earlier, thanks to an 80% drop in rate/term refis.

Meanwhile, cash-out refis were off just 4% on an annual basis. However, the number of transactions fell for the second consecutive quarter, and growth in overall equity withdrawals slowed.

Ultimately, a cash out refinance won’t make sense for a lot of homeowners if their existing mortgage rate is in the 2-3% range.

Sure, it’s nice to tap into that equity, but not if you have to replace your first mortgage rate with a 5-6% interest rate.

What About a Second Mortgage, Such as a HELOC or Home Equity Loan?

The alternative a lot of borrowers are looking at now that mortgage rates are no longer on sale is a second mortgage.

Banks and mortgage lenders are also ramping up their offerings to account for this trend.

There are basically two main options available to homeowners; a home equity line of credit (HELOC) and a fixed-rate closed second.

The HELOC works similarly to a credit card in that you can borrow only what you need, pay it back over time, or simply keep it open for a rainy day.

The downside to the HELOC is that it features an adjustable interest rate, which is tied to the prime rate.

Whenever the Fed moves rates higher, the prime rate will go up by the same amount.

The Fed is expected to raise rates .50% in June and July to tame inflation. This will translate to a 1% increase in HELOC rates.

Of course, they might be done after that, and if the economy goes into a recession, they could turn around and lower rates too.

So HELOCs might have a somewhat telegraphed price assumption over the next year or so.

If you are risk averse, there’s the home equity loan, which allows you to borrow the full amount at closing.

You get a lump sum of your equity, but no additional draws in the future. The upside is that the interest rate is typically fixed.

The downside is that the interest rate is likely higher than a HELOC to account for the fixed rate advantage.

And as noted, you borrow the full amount, whether you need it or not. This means paying interest on the full amount.

Still, either option may be advantageous to a cash out refinance, which disrupts your first mortgage.

Use a Home Equity Sharing Company?

There are also so-called “home equity sharing companies” where you trade a portion of future home price appreciation for cash today.

One such company in this emerging industry is Point, which allows you to get payment-free cash.

However, you do give up a share of your (hopefully) rising property value in exchange, and they charge an upfront transaction fee that is deducted from your proceeds.

The cost of borrowing then depends upon when you pay it back, via home sale, refinance, or simply buying them out. And how much your property appreciates during that time period.

There was a similar company called Noah, which paused applications a while back. It’s unclear if they’ll resume lending at some point.

Other names in the nascent field include Hometap, Unison, and Unlock.

Personally, I don’t love the idea of giving up future gains, especially when they’re unknown. But it’s an option nonetheless.

Seniors Can Consider a Reverse Mortgage to Tap Available Home Equity

One final option to consider, assuming you’re a senior (62+) is the reverse mortgage.

Not only does it allow you to tap your available home equity, but it also comes with no monthly payments.

This is obviously a plus if you’re retired or close to retirement and want to keep your home, but need cash.

It may also be easier to qualify for a reverse mortgage versus a traditional mortgage, especially for fixed income borrowers.

Like the options discussed above, it’s possible to take out a reverse mortgage as a line of credit, or opt for a lump sum payout.

Additionally, you can opt for an adjustable-rate mortgage or a fixed-rate mortgage. So there’s lots to consider.

There are pros and cons to all those options, and which one you choose will be based on your individual needs and risk appetite.

Reverse mortgages can be more complicated than a traditional mortgage, so shopping around could come with the added benefit of education.

It may also allow you to see more loan program options and scenarios to choose from, including proprietary offerings.

To sum things up, it’s not nearly as cheap as it was just a few months ago to tap your home’s equity, but there are still opportunities on the table.

Take the time to educate yourself about each to determine which, if any, is best for you.

Source: thetruthaboutmortgage.com

Bonds Are Having a Rough Year. Here Are 3 Actions That Can Help

During the past few weeks, several clients have asked the question, “Why are my bond investments losing money?” They were surprised to see the results of their bond portfolio over the last year.

I understand why investors are perplexed. The Bloomberg Barclays Aggregate Bond Index is down 8.9% in 2022 through May 31. It’s no secret inflation, high gasoline prices and the war in Ukraine are causing stock market volatility. However, most investors view bonds as the safe part of their portfolio. While they are generally less volatile than stocks, rising interest rates are causing bond yields to increase. When yields rise, the price of a bond will drop.

Here’s an example of how this works.

Let’s say one year ago a person bought a $1,000 corporate bond from a company, and the bond yields 1% annually. One year later, interest rates have risen and the same company now issues new bonds for $1,000 with a yield of 2.5%. This makes the older bond less attractive. If the holder of the older bond wants to sell it, they would have to take a loss since any buyer would want a 2.5% yield.

As the Federal Reserve moves to fight inflation, interest rates are expected to continue to climb for the next several months and possibly into 2023.

While there are no magic bullets to quickly reverse the performance of an investor’s bond portfolio, here are three moves for investors to consider.

Try a Different Bond-Buying Strategy

When the Federal Reserve cut interest rates to near 0% overnight two years ago to offset the impact of the COVID-19 crisis, we advocated investing in bond funds and decreased our investment in individual bonds where it made sense. We did this because the bonds in those funds were already providing higher yields than if we had purchased individual bonds.

Now, as rates have started to rise, the reverse could make sense.  Investors may look to replace these bond funds with individual bonds, which have a better yield since the funds now hold bonds with lower yields.

As part of this strategy, investors can look to purchase short-dated bonds that will mature within a few years. While bonds with longer maturity dates – such as 10+ years – often have higher yields, the increase isn’t all that much (because of what is called a flat yield curve). For investors expecting rates to rise, the longer-dated bonds will be hit hardest if rates do rise.

For those investors who expect rates to hold or fall, or those who tend to pull a low percentage of their portfolio for living expenses, it could make sense to go out a little further than a few years and “lock in” the yields that we are seeing now, despite them not being much higher than the short-term rates.  While the price of the bond could still go down if rates rise, the investor is locked in to the yield at the time of purchase.

Consider Building a Bond Ladder

The second strategy we used was a bond ladder to help provide a steady performance over a longer period. Think of each bond as one of the rungs on a ladder. Once a bond matures, its proceeds are reinvested in a new bond that has a higher yield.

Here’s a hypothetical example of the potential benefit of the bond ladder for an individual investor:

A retiree may want to hold seven to 10 years of their cash flow needs in safe assets. To do this they can use a mix of bonds and cash.  If the retiree spends $200,000 annually, they may look to target between $1.4 million and $2 million in this bucket.

To achieve this goal, purchasing individual, shorter-term bonds can maintain flexibility to invest in attractive yields. As the short-term bonds mature, it may be possible to reinvest with longer-dated bonds with better yields if rates have risen. This approach enables the retiree to live off these safe assets for their targeted time period, without needing to dip into the rest of their portfolio, which consists of stocks or other investments.

As a result of this strategy, the shorter-term volatility of the equity markets often means much less to the retiree. While there is both an art and a science to managing the balance of increasing the portfolio value and meeting the retiree’s future needs, it is comforting to many retirees to know that, in a down market, it could be several years before they even need to look to that part of their portfolio for living expenses.

Know that Bond Losses May Provide a Tax Benefit

As investors begin the process of selling bond funds, there is one benefit. Most bond funds purchased in the last five years have likely declined in value. Investors holding them in a taxable account, the investor can use the loss from the sale to offset part of their tax bill. This is called tax-loss harvesting.

By selling an investment that is a loss, a person can reduce their capital gains taxes and potentially offset up to $3,000 in ordinary income. The money from the sale of the bond fund is then reinvested in a different security – in this case, an individual bond – that meets the investor’s financial goals.  Therefore, an investor can not only get a tax benefit, they can also lock in a better yield – a win-win.

Despite losses in 2022’s first quarter, bonds have an important role to play in nearly every investor’s portfolio. While each person has different needs and goals, they can work with their adviser to develop a bond strategy generating steady returns over the long term, providing the security any investor needs.

Adviser, Moneta

Matt Schaller brings more than a decade of experience in the financial services industry to his role as an adviser with Compardo, Wienstroer, Conrad & Janes (CWCJ) Team at Moneta, a Top 10 Registered Investment Advisory Firm, according to Barron’s. Matt is both a Chartered Financial Analyst® Charterholder and a CERTIFIED FINANCIAL PLANNER™ Professional. His extensive background in client service, coupled with his previous experience as an investment research analyst, offers a unique lens for clients’ investment decisions.

Source: kiplinger.com

What Is Preferred Stock, And Should I Buy It?

It’s not the sexiest thing going, but preferred stock, which typically yields between 5% and 7%, can play a beneficial role in income investors’ portfolios.

As long as those investors know exactly what they’re getting into.

Before we get started, know that preferred stock as an asset class is somewhat complicated and covers a lot of ground, so we’ll be hitting only some of its more salient characteristics here.

Suffice to say, that – as with any investment – it’s critical for individual investors to understand the particular terms and features of the preferred stocks they are buying. 

How Does Preferred Stock Work?

Preferred stocks are often called “hybrid” securities because they possess both bond- and equity-like aspects. Like common stocks, preferreds represent an equity interest in a company. However, like bonds, they also pay regular interest or dividends based on the face – or par – value of the security on a monthly, quarterly or semi-annual basis.

On the upside, preferred stocks usually feature higher yields than common dividend stocks or bonds issued by the same firm. Their dividend payments also take priority over those attached to the company’s common stock dividends. If the company faces a cash crunch, common stock dividends get cut first.

And what happens if the company misses a preferred dividend payment? Well, it depends.

If the preferred stock is a cumulative issue, the unpaid dividends are considered to be in arrears and accumulate in an account. (Missing a payment on preferred stock is not considered to be a default event.) Those dividends must then be distributed to preferred shareholders before any dividends can be paid to common stockholders. 

However, if the preferred stock is non-cumulative, the preferred stockholder is left holding the bag. 

That’s an important distinction. Although preferred shareholders have seniority over common shareholders when it comes to dividend payments, those dividends are not necessarily guaranteed. 

What Are the Downsides to Owning Preferred Stock?

Preferred stockholders also stand in line ahead of common stockholders in case of bankruptcy or liquidation. That said, a long list of creditors and bondholders have seniority over preferred shareholders should financial catastrophe strike. 

If common stockholders are at the bottom of the bankruptcy food chain for recouping at least some of their capital, preferred stockholders are closer to the middle – but not by all that much.

Among the downsides of preferred shares, unlike common stockholders, preferred stockholders typically have no voting rights. And although preferred stocks offer greater price stability – a bond-like feature – they don’t have a claim on residual profits. That means preferreds don’t share in the potential for price appreciation that common stocks do.

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As such, preferred stock prices move in a narrower range, and tend to do so more on interest-rate risk or the issuing company’s credit risk.

Some would argue those are high prices to pay to secure only a somewhat higher yield. But the caveats don’t end there.

How Preferred Stocks Are Like Bonds

Preferred stocks come with maturities, which tend to be very long. True, some preferred stocks are perpetual, meaning they never mature, but maturities of 30 years or longer are typical. 

Which brings us to this thought experiment: If you were buying a bond instead of a preferred stock, ask yourself if you would be comfortable owning an instrument with such an extended date to maturity for the yield you’re receiving and the risk you’re assuming.

It’s also important to remember that securities with longer maturities are more sensitive to changes in interest rates. Just as with bonds, preferred stock prices fall when interest rates rise. 

At the same time, preferreds are often callable. That is, the issuer reserves the right to redeem the security after a certain period of time has passed. As with bonds, preferred shareholders run the risk that the issuer will exercise its call option when interest rates are low.

No income investor wants to be handed back a big ol’ bag of money to invest when interest rates are lower rather than higher. 

Should I Buy Preferred Stock?

Going back to the plus column, preferred stocks are transparent and convenient in a way that individual bonds are not. They trade on a stock exchange, which gives them price transparency and, importantly, liquidity. 

Be forewarned, however, that depending on the size of the issue, the bid-ask spread on a preferred stock can be comparatively wide. That means it might be harder to buy or sell your preferred stocks at the prices you seek. 

To sum it up:

  • Preferred stocks are usually less risky than common dividend stocks, and carry higher yields, but lack the opportunity for price appreciation as the issuing company grows. They also go without voting rights. 
  • Preferred stocks are riskier than bonds – and ordinarily carry lower credit ratings – but usually offer higher yields. Like bonds, they are subject to interest-rate and credit risk.

The big selling point is that preferred stocks can offer steady income with higher yields. And, yes, they could very well deserve a place in your portfolio, complementing, say, your allocations to dividend stocks and fixed income investments.

But, as with every investment opportunity, you must do your own careful due diligence first. 

Source: kiplinger.com

Don’t Want to Leave Money to Your Kids? You’ll Probably Change Your Mind.

Some parents fear leaving their children too much money. They talk about their friend’s child, who ended up doing little with their lives and abusing drugs and alcohol. Or they have an image of “trust fund babies” who sleep all day and party all night.

The good news is that the vast majority of children with inherited wealth do lead productive lives and would not fall into any of the above descriptions. Their parents set expectations, provided guidance and encouragement, and set limits when the children were growing up. No surprise their children turned out just fine.

Parents also fear leaving their children a significant part of their wealth because it could ruin their drive to live a productive life, fearing they simply might not feel the need to work. Or that the children will feel that any financial success they achieve will not be meaningful compared to their inheritance. So, they choose to leave a relatively small inheritance, enough to help but not eliminate the need to work. But parents often greatly underestimate the amount their children may need simply as a safety net, let alone to enhance their lives. Further, parents may not be aware there are certain controls they can put on the money they leave to their children that can assuage fears about misuse.

As parents grow older, learn about these controls, and start to realize economic conditions are different, many end up changing their minds about how much money they want to leave their grown children. Coming to this conclusion earlier rather than later can have its benefits.

Here’s how to re-think leaving money to your children.

Determine your goals

If a parent’s concern is that they will harm their child by leaving them too much money, they need to determine what dollar amount will cause that harm. The answer depends on what they want their children to achieve with the money. Then consider the what-ifs. For example, assume a parent wants to leave their child $500,000.

  • What if the adult child has a health crisis or they have a baby with a disability, incurring significant costs to the adult child and/or preventing them from being able to work?
  • What if the market sinks and the $500,000 becomes $250,000?
  • What if despite working hard, they or their employer are put out of business by a competitor, regulations or shifts in consumer taste?

While $500,000 may seem like a lot, if you take into consideration all the possibilities, it can be dissipated quickly on non-frivolous expenses. On the other end of the spectrum, some parents ask where the limit is. When is the line crossed from “enough” to “too much”? They want to help their kids, but they don’t want to give them beyond what they could possibly need.

These goals may change as the child ages and grandchildren are born. Once their adult child starts working, parents may want to help with rent so they can have a nicer place to live or groceries so they eat a healthier diet. When grandchildren enter the picture, the parents may want to help their adult children buy a big enough house in a safe neighborhood with good schools. Grandparents may want to help pay for the grandkids’ higher education (or even private school for K-12) or want to ensure they will be able to afford good health care.

Parents’ goals and perspectives change over time, and financial plans change along with them.

Learn about controls and family conflict

Parents can put controls on the wealth they leave their adult children by using trusts. Parents can choose a trustee to manage the trust so the kids don’t have full access or control. The trust can help them get an education, buy a place to live and start a business, but they can’t just live off the trust and sit around doing nothing. These controls can be different for each child. If parents know one child won’t lose their drive no matter how much money they have but another child will spend it all in a week, the children can be given different, access, controls and rights over their trusts.

These differences could cause conflict in the family, so parents need to keep an open line of communication with their children to explain their concerns and why they set the trusts up the way they did.

Teach your children about money

It’s up to parents to teach their children how fortunate they are to inherit anything, and that responsibility comes along with having money. Used properly, wealth can provide a safety net for unforeseen circumstances (which always arise) and provide a better lifestyle than a child might otherwise attain with his or her own income. Used wisely, having wealth can impact the children’s own communities if used to create jobs by starting or growing a business. Parents can teach their children that while they have a comfortable lifestyle, they can also use their money to benefit the world around them.

Parents may fear that leaving their children money will end up doing more harm than good, but if parents teach their children from a young age how to properly use their wealth and set expectations, it’s less likely the children will use it irresponsibly. And if parents are still fearful their kids won’t use their money properly, they can place controls on what they give. But parents’ goals will inevitably change as they get older and situations change, so leave room for flexibility.

Partner in Trusts & Estates, Kirkland & Ellis

David A. Handler is a partner in the Trusts and Estates Practice Group of Kirkland & Ellis LLP. He concentrates his practice on trust and estate planning and administration, representing owners of closely held businesses, family offices, principals of private equity and venture capital funds, individuals and families of significant wealth, and establishing and administering private foundations and other charitable organizations.

Senior Managing Director, NFP Insurance Solutions

Howard Sharfman, Senior Managing Director of NFP Insurance Solutions, is a leader in the insurance business, managing one of the premier and largest wealth transfer consulting and planning firms in the country. Mr. Sharfman’s practice is highly focused on servicing families with multigenerational wealth.

Source: kiplinger.com

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

Keep reading to understand how to calculate dividend yield, and how to use it as a metric in your investment choices.

How to Calculate Dividend Yield

What is dividend yield, exactly, and how does it differ from dividends?

•   Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

•   Dividend yield refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

What Is the Dividend Yield Formula?

Now to answer the question: How to calculate dividend yield? The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price.

Annual dividend / stock price = Dividend yield (%)

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

Dividend Yield: Pros and Cons

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

•   From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

•   For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

•   Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

   Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

•   A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

•   Investors need to look beyond yield to the type of dividend they might get. And investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

Pros and Cons of Dividend Yield

Pros Cons
Can help with company valuation. Dividend yield can indicate a more established, but slower-growing company.
May indicate how much income investors can expect. Higher yield may mask deeper problems.
Yield doesn’t tell investors the type of dividend (ordinary vs. qualified), which can impact taxes.

Start investing in dividend
paying stocks and ETFs with SoFi.

The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount.

A company that pays a $1 per share dividend, has a dividend rate of $4 per year. If the share price is $100/share, the dividend yield is 4% ($4 / $100 = 0.04).

The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments. Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

If you’re ready to invest in dividend-paying stocks, consider opening an Active Invest account with SoFi Invest. You can trade stocks, exchange-traded funds (ETFs), IPO shares, and crypto, — right from your phone or laptop, using SoFi’s secure online platform. SoFi doesn’t charge management fees, and SoFi members have access to complimentary financial advice from professionals. Get started today!

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Top Real Estate Terms You Need to Know

Buying a home can be a challenging prospect, particularly for people looking to get into the market for the first time. There is a lot to be aware of throughout the process, so we have put together a convenient list of the top real estate terms that you need to know when buying a home.

Comparative market analysis (CMA) – An in-depth analysis which is provided by a real estate agent that determines the estimated value of a home based on homes that have been sold recently that are a similar size, condition, age or have similar features and are located in the same area.

Buyers/balanced/sellers market – A buyers market occurs when the number of homes for sale outnumber buyers. A seller’s market occurs when conditions favour sellers, and there are less homes available than there are people looking to buy a home. A balanced market sits between those and is an optimal time to buy and/or sell.

Read: Entering a Balanced Market Spells Relief for Many Buyers: CREA

Housing ratio – This is one of two debt-to-income ratios that a lender analyzes to determine a borrower’s eligibility for a home loan. This ratio compares the total housing cost (principal, homeowners insurance, taxes and private mortgage insurance) to your gross income.

Debt-to-income ratio (DTI) – A ratio that compares a home buyer’s expenses to their gross income.

Adjustable-rate mortgage (ARM) –  An ARM has an introductory interest rate that lasts a set period of time and adjusts every six months thereafter for the remainder of the loan term. Once the time period has ended, your interest rate will change, as will your monthly payment.

Fixed-rate mortgage – A mortgage with principal and interest payments that remain the same throughout the duration of the loan, because the interest rate does not change.

Private mortgage insurance (PMI) – This is a fee charged to borrowers who make a down payment that is less than 20% of the home’s value. Typically 0.3% to 1.5% of the yearly loan amount., this fee can be canceled in certain circumstances when the borrower reaches 20% equity.

Pre-qualification – This is a basic assessment of your income, assets and credit score which determines what loan programs you might qualify for, if any. An agent may request this or a pre-approval letter before showing a potential buyer a home.

Pre-approval – This is a thorough assessment of a borrower’s income, assets and other data to help determine a loan amount they would be able to qualify for. An agent may request one of these or a pre-qualification letter before showing a buyer a home.

Read: Reality Check: Interest Rates are Rising, Securing a Mortgage Now is Best for Buyers

Approved for short sale – This indicates that a homeowner’s bank has received an offer from a buyer and has determined the reduced listing price on a home meets their short sale criteria, based on the seller’s circumstances and how much is owed.

Origination fee – This is a fee charged by either a broker or lender to underwrite and process a home loan application. This is not a single fee, but a set of lender-specific fees that are part of your costs when closing a mortgage loan.

Amortisation – This is the process of paying off a loan through a series of periodic payments to a lender. This includes two items – interest and principal, which is the amount of money you borrowed.

Closing costs – Costs outside a property’s sale price that need to be paid to cover the cost of the transaction. This could include discount points, insurance fees or survey fees, among others. These can vary from location to location but must be described to you when you submit your mortgage loan application.

Debt-to-income ratio (DTI) – A ratio that compares a home buyer’s expenses to their gross income.

Contingencies – These are conditions that are written into a home purchase contract that protect the buyer, should issues arise with financing, the home inspection, etc.

Equity – The percentage of a home’s value owned by the homeowner.

If you’re considering buying a home in the coming months, contact us to talk to an agent and receive a free consultation.

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Source: zoocasa.com