SIE Ready🧾 Equity Securities · Lesson 5 of 5 · 5 min
How Stock Pays: Dividends, Gains and Yield
📊 A stock can pay you two ways: cash along the way and a higher price when you sell. The SIE wants you to measure both.
💡 Key idea
Current yield = annual dividends ÷ current price. Total return adds dividends to price change and divides by what you paid.
🧠 Why it matters
DIVIDENDS are paid only when the board declares them. CAPITAL GAINS (or losses) are realized when shares are sold for more (or less) than cost. CURRENT YIELD = annual dividends ÷ current market price. Example: $0.50 quarterly ($2.00 a year) on a $50 stock = 4%. TOTAL RETURN = (dividends + change in price) ÷ purchase price. Example: buy at $40, collect $2, sell at $44: ($2 + $4) ÷ $40 = 15%. TAXES at a high level: dividends are taxed as ordinary income unless QUALIFIED. Qualified dividends get the lower long-term capital gains rates; one requirement is holding the stock more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Both appear on Form 1099-DIV.
📈 In the real world
🧾 Ana bought 100 shares of Pinecrest Foods at $25. Over the year she received $1 per share in dividends and the stock rose to $27. Her total return: ($1 + $2) ÷ $25 = 12%. At today's $27 price, the $1 dividend gives a current yield of about 3.7%.
📌 Takeaways
- Dividends are declared by the board, never guaranteed
- Current yield uses today's price; total return uses your purchase price
- Qualified dividends get long-term capital gains rates if holding rules are met
📖 Terms in this lesson
Qualified dividend: A dividend that meets IRS holding-period and source tests and is taxed at long-term capital gains rates rather than ordinary rates.
Total return: Income received plus the change in price over a period, divided by the starting value.
✅ Test yourself
A stock trading at $80 pays a quarterly dividend of $0.60. What is its current yield?
- 0.75%
- 6.0%
- 4.8%
- 3.0%
Answer: D · 3.0%
Annual dividend = $0.60 × 4 = $2.40; $2.40 ÷ $80 = 3.0%. 0.75% uses only one quarter's dividend; 4.8% and 6.0% come from arithmetic errors.
An investor buys a stock at $50, receives $3 in dividends and sells it a year later at $47. What is the total return?
- 6% loss
- 0%
- 12% gain
- 6% gain
Answer: B · 0%
($3 dividends − $3 price drop) ÷ $50 = 0%. The 6% figures count only the dividend or only the price change; 12% adds them with the wrong sign.
Compared with ordinary dividends, qualified dividends are:
- Paid only by preferred stock
- Taxed only when the stock is sold
- Taxed at long-term capital gains rates
- Exempt from federal income tax
Answer: C · Taxed at long-term capital gains rates
Qualified dividends are ordinary dividends that meet IRS rules (including a holding period) and are taxed at the lower long-term capital gains rates. They are still taxable, are paid on common too, and are taxed in the year received.
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