Definition
Dividend yield is a stock's yearly dividends per share divided by its current share price, expressed as a percentage, showing the cash income the dividend represents relative to the price.
How it works
The formula is dividend yield = annual dividends per share ÷ share price × 100. A trailing yield uses the dividends actually paid over the last 12 months. A forward yield uses the dividends expected over the next 12 months, often by multiplying the latest regular payment by the number of payments per year. Data sources may use different methods, so the same stock can show slightly different yields.
Because the price is in the denominator, the yield changes every time the share price moves. When the price falls and the dividend stays the same, the yield rises. A very high yield can therefore signal that the market expects trouble, and the dividend may later be reduced. This situation is often called a yield trap.
Dividends are not guaranteed. A company's board decides each payment and can raise, cut or suspend it. Dividend yield also ignores price changes, so it shows only one part of total return. Taxes on dividends depend on the country and the type of account.
Example (hypothetical numbers)
Suppose Company X pays $0.50 per share every quarter and its shares trade at $50.
Annual dividend = $0.50 × 4 = $2.00, so the yield = $2.00 ÷ $50 × 100 = 4%.
If the price falls to $40 and the dividend is unchanged, the yield becomes $2.00 ÷ $40 × 100 = 5%.
If the company then cuts its annual dividend to $1.20, the yield at $40 drops to $1.20 ÷ $40 × 100 = 3%.
The rise from 4% to 5% came from a falling price, not from a larger payout.
Common mistakes
- Picking stocks by the highest yield alone without asking why the price has fallen.
- Assuming the current dividend will continue at the same level in the future.
- Comparing a trailing yield from one source with a forward yield from another.
- Looking at yield alone and ignoring how the share price itself has changed.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.