Dividend Yield

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Charles Armstrong

Asset Prime

Marcus Tan

Dividend Yield is the percentage return a company pays out to its shareholders each year relative to its share price

Dividend yield is calculated as Annual Dividends per Share / Price per Share

This measurement tells you what percentage return a company pays out to shareholders in the form of dividends. Well-established companies tend to pay out a higher percentage, and with greater consistency, than do younger or more volatile companies. However, some companies choose to use the cash for re-investment in the company, potentially leading to a higher share price in the future. Therefore, it is not necessarily true that shareholders are better off investing in companies that pay higher dividends, though a consistently high dividend yield is often considered a sign of a stable, consistent, business.

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.

Examples

• If XYZ company’s annual dividend is $1.50 per share and the stock is trading at $25, XYZ Dividend Yield is 6%. ($1.50 / $25 = 0.06)

• If Company ABC announces annual dividends of $1.50 per share and the stock is trading at $45, ABC's Dividend Yield is 3.3%. ($1.50 / $45 = .033)

See Also

• Dividend
• Average Dividend Yield