What Is Dividend Yield, and How Is It Calculated?

Dividend yield is the dividends a company paid per share over the last year divided by its current share price, shown as a percentage. It tells a shareholder how much cash income a stock is handing back relative to what a share costs today. Because the share price moves every day, the same dividend can produce a different yield from one week to the next.

How it works

The formula and price moves

Dividend yield equals dividends per share over the last year divided by the current share price. Because the price sits on the bottom of that fraction, the yield changes whenever the price changes, even if the dividend itself stays exactly the same.

Using the illustration figures: a stock trading at $80 that paid $2.40 in dividends per share over the last year has a dividend yield of 3%, since $2.40 divided by $80 equals 0.03. If the price fell to $60 while the dividend stayed at $2.40, the yield would rise to 4%, purely because the price dropped, not because the company paid out more.

Payout ratio explained

The payout ratio is dividends per share divided by earnings per share (EPS), the portion of a company's profit that it returns to shareholders as dividends rather than keeping to reinvest. It is a separate figure from yield, but the two are read together: yield shows the return relative to price, and payout ratio shows how much of the company's earnings that return is eating up.

A low payout ratio can mean a company has room to raise its dividend later. A high payout ratio can mean less cushion if earnings slip, since more of the profit is already going out the door.

A high yield can be a warning

A dividend yield that looks unusually high compared with similar companies does not automatically mean a bargain. It can mean the share price has fallen sharply because the market expects the company to struggle, and investors often anticipate that struggling companies will eventually cut the dividend.

• A falling price with an unchanged dividend mechanically pushes the yield up, as shown in the illustration above.
• A yield that looks out of line with a company's earnings or payout ratio is one sign worth a closer look, rather than a reason on its own to treat the yield as attractive.

Trailing yield versus forward yield

Trailing yield uses the dividends a company actually paid over the past year. Forward yield uses the dividend rate a company has most recently announced, projected forward, which may differ from what was paid in the past twelve months if the company has just raised, cut, or changed the schedule of its dividend.

The two can diverge right after a dividend announcement, since the trailing figure still reflects older payments while the forward figure reflects the newest declared rate.

Dividends can change

A dividend is not a contractual promise. A company's board of directors decides each payment and can raise it, lower it, pause it, or stop it entirely, depending on earnings, cash needs, or strategy.

Because of this, a dividend yield calculated today describes the past year of payments, not a guarantee of what a company will pay going forward.

What it cannot tell you

Dividend yield on its own does not say whether a company's earnings can support its dividend, which is what the payout ratio and other figures speak to. It also does not capture total return, since it leaves out any change in the share price itself, and it says nothing about whether, when, or by how much a board might change the dividend in the future.

A worked example with real figures

Using the worked example, Coca-Cola's dividends per share over the last twelve months, $2.10, divided by its share price of $95.59, gives a dividend yield of 2.20%. Dividing that same $2.10 by Coca-Cola's earnings per share of $3.32 gives a payout ratio of 63.25%, meaning a large share of Coca-Cola's profit is paid out as dividends rather than retained. Benzinga reported that Coca-Cola's annual dividend yield stood near 2.29% with quarterly dividends of 53 cents a share, a figure close to but not identical to the trailing yield shown here, reflecting the different dividend and price inputs used.

Apple's dividends per share of $1.06 divided by its share price of $343.41 produces a dividend yield of 0.31%, far below Coca-Cola's. Dividing that $1.06 by Apple's earnings per share of $8.73 gives a payout ratio of 12.14%, showing that Apple retains most of its profit rather than distributing it as dividends.

Set side by side, the two companies show different approaches to cash: Coca-Cola returns a much larger share of its earnings to shareholders as dividends, while Apple pays out a small fraction and keeps the rest within the business.