Dividend yield

What is Dividend Yield?

If you are a value investor or looking for dividend income then there are a couple of measurements that are specific to you. For dividend investors, one of the telling metrics is Dividend Yield.

Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher.

Dividend yield is an easy way to compare the relative attractiveness of various dividend-paying stocks.

This measurement is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

In others words, dividend yield tells you what percentage return a company pays out to shareholders in the form of dividends. It is known that older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent.

How it is calculated?

You can calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price:

dy = annual dividends per share / price per share

To better explain the concept, refer to this dividend yield example:


Two companies both pay annual dividends of $2 per share.

The XPTO company's stock is trading at $20. So, the XPTO's dividend yield is:

dv = 2 / 20 = 0.1 (10%)

The ACME company's stock is trading at $25. So, the ACME's dividend yield is:

dv = 2 / 25 = 0.08 (8%)

Thus, the stocks from company XPTO, that pays the highest dividend yields, would be preferable, but, care is needed when assessing this indicator, because as the share price is in the denominator, the dividend yield may seem high if the stock price is too low. What actually may reflect some kind of problem with the company instead a good policy to pay dividends.

It should be noted that companies do not announce a dividend yield per se, but rather a total dividend per share, the yield then being calculated from the current share price.

Thus, a company with a particularly volatile stock price may see drastic swings in dividend yield despite a consistent dividend. As such, an increasing dividend yield over some period of time (quarterly, annually, etc.) while the dividend itself remains stable is often considered a sign of an artificially low (i.e. undervalued) stock price.

In conclusion

Dividend yields is an useful tool to help you pick some good stocks and build a effective portfolio. But it shouldn't be used as an unique parameter to pick stock.

It would be much wiser to use it combined with others analisys tools and techniques.