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.
In the app, this lesson comes with the Savvy SIE Pass ($9.99 one-time, 6 months). The first lesson of every module is free.