Dividend Yield

Income Metric Investment Wiki — Fundamentals
Dividend Yield is a simple financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It allows income investors to quickly assess the cash return on investment they would receive by holding the stock, making it easy to compare dividend-paying equities with fixed-income assets like bonds.
Quick Reference
Type Income Metric
Formula Annual Dividend per Share ÷ Share Price
Average Target 2.0% - 4.0%
Warning Zone > 8.0% (Potential value trap)
Best Used For Assessing income generation and comparing to risk-free rates

1.0 The Formula

Basic Form

formulaDividend Yield = (Annual Dividend per Share / Current Share Price) × 100

The Annual Dividend per Share is the sum of the dividends paid over the past 12 months (trailing yield) or the most recent quarter's dividend multiplied by four (forward yield). The Current Share Price is simply the market price of the stock. Because the stock price fluctuates daily, the dividend yield changes daily as well.

Worked Example

Company Annual Dividend Share Price Dividend Yield
Company A $4.00 $100.00 4.0%
Company B $4.00 $200.00 2.0%
Company C $1.00 $10.00 10.0%

If you invest $10,000 in Company A, you will receive $400 in cash per year. If you invest the same amount in Company B, you will only receive $200. Company C offers the highest yield, but as explained below, an extremely high yield is often a red flag.

Yield moves inversely to price. If a company's stock price falls by 50% but the dividend remains identical, the yield doubles mechanically. Therefore, high yields are often a consequence of crashing stock prices.

2.0 Interpretation & Edge Cases

Benchmarks

Dividend yields must be compared against the "risk-free rate" (like the 10-Year US Treasury yield) to determine if the premium is worth the equity risk.

  • 0%: The company does not pay a dividend (common for high-growth tech firms that reinvest all cash).
  • 1% - 3%: Typical for mature, healthy companies that also offer capital appreciation.
  • 4% - 6%: Typical for slow-growing cash cows, real estate investment trusts (REITs), and utilities.
  • 8%+ (Value Trap): Often a warning sign. The market has dumped the stock because it anticipates the dividend will be cut.

When it Fails (Pitfalls)

The trap for amateur investors is "yield chasing"—buying a stock simply because the yield is 10%. A 10% yield usually indicates distress. If the company is generating poor earnings and cuts the dividend entirely, the investor loses their income stream and likely suffers massive capital losses when the stock dumps further.

Never analyze dividend yield in isolation. You must check the Payout Ratio. If a company earns $1.00 per share but pays a $1.50 dividend, the dividend is entirely unsustainable and is being funded by debt or cash reserves.

3.0 Related Pages

Payout Ratio

Crucial for testing dividend safety. Ensures the dividend is covered by actual earnings.

Free Cash Flow Yield

Dividends are paid in cash, not accounting earnings. FCF Yield determines if the company generates enough cash to sustain the dividend.

Earnings Per Share (EPS)

The foundational metric that eventually funds the dividend payout over the long term.