All about annualized yield

I got a few questions from readers yesterday about how I calculated the annualized yield of the OceanaGold PH [OGP 13.58, up 0.7%; 309% avgVol] Q2 dividend [link] so I thought that I would walk everyone through how I calculate annualized yield, why I do it, and the benefits and limitations of using annualized yield generally.

> First, the background:  OGP declared a $0.0066/share Q2 dividend out of its free cash flow for the period. Since OGP listed on May 13 and Q2 ends on June 30, the dividend was only sourced out of the free cash flow from this period. Inclusive of May 13th and June 30th, the period is 49 days in length.

This was OGP’s first dividend as a public company, and its first as part of its plan to declare quarterly dividends of at least 90% of its free cash flow.

> What is annualization?  Annualization is a way for us to compare investment options that might have different dividend timelines by converting a single dividend (like a quarterly dividend, in this case) into an annual figure. We always talk about the dividend yields of fixed-income and dividend stocks using full-year figures. It’s important to remember, however, that when we annualize we also make certain assumptions and that any changes to those assumptions might result in a dramatic change to the company’s actual future dividends.

Annualization is just a tool for comparison and estimation. Put bluntly, annualization says: “What would the full-year dividend look like if every dividend this year looked just like this last one?”

> Let’s annualize it!  Ok, with that out of the way, the first thing we will do to annualize OGP's div is convert the USD dividend to PHP. While this conversion will happen automatically on the payment day at whatever the exchange rate will be on that date, I just converted it at the current exchange rate to come up with a Q2 dividend amount of P0.39/share.