Dividend yield

Dividend yield is a stock's annual dividends per share divided by its current share price, expressed as a percentage. It shows how much cash income a shareholder receives each year for every dollar invested at today's price.

How it works

Dividend yield = annual dividends per share / share price x 100

Two versions are common:

• Forward (indicated) yield: annualizes the most recent regular dividend. A $0.50 quarterly dividend is treated as $2.00 a year.
• Trailing yield: uses the dividends actually paid over the past twelve months.

The two differ after a raise, a cut, or a special dividend, which is usually excluded from forward yield because it is not expected to recur.

Yield moves inversely with price. If the dividend stays the same and the stock falls, the yield rises.

Why it matters for traders

Yield is a quick way to compare income stocks with each other and with bond yields. But a very high yield is often a warning rather than a bargain: the market may be pricing in a dividend cut. Check:

• Payout ratio: is the dividend covered by earnings and free cash flow?
• Trend: did the yield rise because the dividend grew, or because the price collapsed?
• Sector norms: utilities, REITs and telecoms typically yield more than technology companies.

A sudden yield spike after a sharp price drop is a classic "yield trap" setup.

Example

Pinecrest Foods (ticker PCFD) pays $0.45 per quarter and trades at $36. Its forward yield is ($0.45 x 4) / $36 = $1.80 / $36 = 5.0%. If PCFD falls to $24 on weak results without changing its dividend, the yield jumps to $1.80 / $24 = 7.5%.

FAQ

What is a good dividend yield?

It depends on the sector and on interest rates. A yield far above peers often reflects market doubts about sustainability.

Why does dividend yield go up when a stock falls?

The dividend stays the same while the price drops, so the dividend becomes a larger percentage of the price.