Dividend yield

The dividend per share (total dividends paid out divided by total number of shares) expressed as a percentage is referred to as the dividend yield.

A dividend yield is simply a company’s total annual dividend per share – the amount of money it has paid or will pay to shareholders in a year – divided by its current share price and expressed as a percentage. For example, if a company paid a single dividend of 10p per share this year and its shares are trading at a price of 1,000p, the dividend yield would be 10p ÷ 1,000p = 0.01 (which is 1%). If the firm paid a dividend of 5p after half a year (usually called an interim dividend) and a further 10p at the end of the financial year (a final dividend), you would add the two together and get (5p + 10p) ÷ 1,000p = 0.015 (1.5%).

Dividends are not fixed: a company may vary its dividend according to how profitable the past year has been, whether it needs to hold on to more of its profits to invest in maintaining or growing its business, or whether it has more cash than it needs and wants to make an extra one-off payment to shareholders (often called a special dividend). So we need to take this into account.

To get a more complete picture, the dividend yield can be calculated based on what the firm paid in the past 12 months or calendar year (sometimes referred to as the trailing or historical dividend yield) or on the amount that it’s expected to pay over the next 12 months (a forecast or forward dividend yield). Trailing yields reflect what has actually been paid – but past dividends may not be sustainable. Forecast yields reflect any changes that analysts expect – but forecasts are unreliable.

Investors should look at both, but should not rely solely on either to make their decision: you need to think about the long-term prospects for a firm’s dividends, including any signals that the market is sending. A firm with a very high yield may look cheap, but this could indicate that investors expect the dividend to be cut. Meanwhile, a firm with a lower yield might be expected to grow it rapidly in the years ahead. 

See Tim Bennett's video tutorial: How to pick income winners: What is a dividend yield?

Recommended

Investment trusts for your ISA
Investment trusts

Investment trusts for your ISA

Depending on your investment aims, these are the investment trusts to consider for your ISA
7 Mar 2023
What is an investment trust?
Too embarrassed to ask

What is an investment trust?

“Active” investment funds come in two main varieties, one of which is investment trusts. But what exactly is an investment trust?
2 Mar 2023
What is a dividend yield?
Too embarrassed to ask

What is a dividend yield?

Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
21 Feb 2023
How to invest in ChatGPT and other AI tech changing the world
Tech stocks

How to invest in ChatGPT and other AI tech changing the world

Technology, like ChatGPT, is changing the way we live and work, and this new tool could have a huge impact on the tech industry says Dominic Frisby.
23 Jan 2023

Most Popular

Government plans could see NS&I boost interest rates
Savings

Government plans could see NS&I boost interest rates

The government-backed bank has a new funding target, which could prompt it to boost the rates on its Premium Bonds, ISAs and bonds.
16 Mar 2023
Share tips of the week – 17 March
Investments

Share tips of the week – 17 March

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages
10 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

As energy prices slide, the government has now extend its energy bill support from April. But what will you bills look like later this year? We have a…
15 Mar 2023