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

Why investment forecasting is futile
Investment gurus

Why investment forecasting is futile

Every year events prove that forecasting is futile and 2020 was no exception, says Bill Miller, chairman and chief investment officer of Miller Value …
21 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
US stocks are obviously in a bubble. But is it a rational bubble?
US stockmarkets

US stocks are obviously in a bubble. But is it a rational bubble?

Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The r…
14 Jan 2021

Most Popular

Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Free 6 issue trial then continue to