How dividend yield is calculated, why a high yield can be a warning, and yield versus total return
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.
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 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.
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.
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.
You may also find this useful: What Is ROI?.
There is no single good number. Broad U.S. stock indexes have yielded only a few percent in recent years; yields far above a company's peers deserve a closer look.
Annual dividends per share divided by the share price, times 100.
Tax rules, limits and pay data change. Check the current figures with the primary source before acting on them.