What Is Dividend Yield? Formula, Examples and Traps

Dividend yield is a share's annual dividend divided by its current price, shown as a percentage. It tells you how much income each dollar invested would produce at today's dividend and today's price — and nothing about whether the price will rise or fall.

The formula

Dividend yield = annual dividends per share ÷ share price × 100. A share priced at $50 that pays $0.50 a quarter pays $2 a year, so its yield is 4%. If the price falls to $40 and the dividend is unchanged, the yield rises to 5% — without the company paying a cent more.

Trailing and forward yield

Trailing yield uses the dividends actually paid over the past 12 months. Forward yield uses the next 12 months' expected dividends, usually the latest payment multiplied by the number of payments a year. Forward yield assumes the dividend will not be cut.

Why a high yield can be a trap

An unusually high yield often means the share price has fallen because investors expect trouble, and a dividend cut may follow. Before relying on a yield, look at the payout ratio (dividends as a share of earnings or cash flow), the company's debt, and its record of paying through downturns.

Yield versus total return

Total return is dividends plus the change in share price. A fund yielding 2% whose price grows can beat one yielding 7% whose price shrinks. Compare investments on total return and cost, and treat yield as one input.

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