Dividend yield

Overview

The dividend yield of a share is the ratio of annualised cash dividends to the share's current market price. It is usually expressed as a percentage and is commonly calculated by dividing the annual dividend per share by the current share price. Closely related measures compare dividends to price and are often referred to as the dividend–price ratio. At the company level, the same idea can be expressed as total annual dividends divided by the company’s market capitalisation, assuming the number of shares remains unchanged. Dividend yield measures dividend income only; it does not include changes in the share price and therefore differs from total return. Reported yields depend on convention: some use a trailing yield, or dividends paid over the previous 12 months, while others use a forward yield, or an indicated dividend based on recent declarations, which may exclude special dividends. Because both dividends and prices can change, a high dividend yield can reflect a higher payout, a lower share price, or expectations that dividends will be reduced.

Definition and basic calculation

Dividend yield is the ratio of a share's annualised cash dividend to its current market price, usually expressed as a percentage. It is commonly written as

Dividend yield

=

Annualised dividend per share Current share price

.

{\displaystyle {\text{Dividend yield}}={\frac {\text{Annualised dividend per share}}{\text{Current share price}}}.}

The same ratio can be expressed at the company level as total annual dividends divided by the company's market capitalisation, when the number of shares is unchanged, this is equivalent to the per-share calculation. For example, a share priced at US$20 paying US$1 in dividends over a year has a dividend yield of 5%.

Calculation conventions

Published dividend yields are not fully standardised. Data providers and index methodologies may use different conventions, including whether yields are based on dividends paid over the prior year or on an estimate for the coming year, and how non-recurring payments and other distributions are treated.

Trailing dividend yield

A trailing dividend yield uses dividends actually paid over the previous 12 months, expressed as a percentage of the current share price. For example, if a company paid four quarterly dividends of US$0.25 over the last 12 months (US$1.00 total) and the current share price is US$20, the trailing dividend yield is:

1.00 20

= 0.05 = 5 % .

{\displaystyle {\frac {1.00}{20}}=0.05=5\%.}

Forward dividend yield

A forward dividend yield uses a projection of dividends for the coming 12 months. One common approach is to annualise the most recent periodic dividend (for example, a quarterly dividend multiplied by four), though some use analyst estimates or company guidance instead. For example, if the most recent quarterly dividend is US$0.30, an annualised forward dividend is US$1.20. At a current price of US$24, the forward dividend yield is:

1.20 24

= 0.05 = 5 % .

{\displaystyle {\frac {1.20}{24}}=0.05=5\%.}

Indicated dividend yield

An indicated dividend yield uses the most recently announced dividend annualised by payment frequency and divided by the current market price. In Bloomberg's equity index methodology, dividend indicated yield is defined this way using the most recently announced gross dividend and dividend frequency. For example, if the most recently announced dividend is US$0.40 and the dividend is paid quarterly, the indicated annual dividend is US$1.60. At a current price of US$32, the indicated dividend yield is:

1.60 32

= 0.05 = 5 % .

{\displaystyle {\frac {1.60}{32}}=0.05=5\%.}

Special dividends and other distributions

Methodologies can differ in whether special dividends are included when forming annualized dividend inputs. For example, S&P Dow Jones Indices defines an indicated annual dividend for some dividend indices and specifies that special dividends are excluded in certain indicated-yield calculations. Methodologies may differ in what counts as an eligible dividend for selection or weighting rules. For some index uses, S&P Dow Jones Indices states that only cash dividend payments declared as regular by the paying company are considered for index eligibility, selection, and weighting rules, with other distributions treated differently. For example, suppose a company paid regular quarterly dividends totalling US$1.00 over the last year and paid a one-time special dividend of US$1.00. If the current price is US$20, a yield that includes both payments would be:

2.00 20

= 0.10 = 10 % .

{\displaystyle {\frac {2.00}{20}}=0.10=10\%.}

A yield computed using regular dividends only would be:

1.00 20

= 0.05 = 5 % .

{\displaystyle {\frac {1.00}{20}}=0.05=5\%.}

Interpretation and uses

Dividend yield is commonly used to compare dividend income relative to share price across dividend-paying companies or funds. Because dividend yield considers dividends only, it is distinct from total return, which combines dividend income with changes in market price.

Valuation and implied expected return

Dividend yield is an input to valuation and expected-return frameworks that start from dividends (or broader cash flows) and discount them to a present value. The constant-growth dividend discount model implies that, under its assumptions, the cost of equity can be expressed as dividend yield plus an expected growth rate. The Federal Reserve Bank of New York’s review of equity risk premium models describes dividend discount models as approaches that infer discount rates (and hence expected returns) from current prices and expected future cash flows, which can include dividends and other payouts.

Academic research on dividend yield and return predictability

Fama and French report that dividend yields have forecasting power for stock returns that increases with the return horizon in their tests (see Fama–French three-factor model). Campbell and Shiller developed a framework in which the dividend–price ratio reflects expectations about future dividend growth and discount rates (expected returns). Cochrane’s survey of discount-rate variation similarly discusses how movements in dividend yields can be interpreted as changes in discount rates and expected returns in present-value relations.

Dividend-focused indices and screening

S&P Dow Jones Indices’ methodology for the Dow Jones dividend index family describes indices that are weighted by measures including dividend yield and indicated annual dividends, subject to constraints that can include caps and other rules. MSCI’s methodology for its high dividend yield indices describes an approach that selects securities with dividend yields above a parent index level and applies dividend sustainability and persistence screens, such as excluding securities with extremely high payout ratios or negative dividend growth measures, before weighting constituents.

Dividend yield and broader payout measures

Dividend yield does not capture other ways companies return cash to shareholders, such as share repurchases. Some academic work therefore uses broader payout measures (for example, payout yield) that combine dividends with net repurchases when studying valuation and expected returns. The New York Fed review similarly notes that cash flows to stockholders can include dividends as well as buybacks and other transactions, although the literature often focuses on dividend distributions.