Dividends are like “reward payments” that companies share with their shareholders—a portion of their profits paid out regularly (usually quarterly). But how do you know if a stock’s dividend is worth it? That’s where dividend yield comes in.
Dividend yield is a financial ratio that shows how much a company pays in dividends relative to its stock price. It helps investors compare income-generating stocks and decide where to invest.
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What is Dividend Yield?
Dividend yield is the annual dividend payment divided by the stock’s current price, expressed as a percentage.
Dividend Yield Formula:
Dividend Yield=(Annual Dividends Per Share/Stock Price Per Share)×100
Example:
- If a stock costs 100∗∗and pays∗∗5 in dividends annually, its yield is 5%.
How is Dividend Yield Calculated?
There are two ways to look at dividend yield:
- Trailing Yield – Based on past dividend payments.
- Forward Yield – Based on expected future dividends (useful for companies that raise payouts often).
Pro Tip: Always check if dividends are sustainable—some companies artificially inflate yields by cutting stock buybacks or taking on debt.
Why is Dividend Yield Important?
Dividend yield helps investors:
✔ Compare stocks – A 3% yield may be better than a 5% yield if the company grows.
✔ Assess income stability – High yields can signal safety (utilities) or risk (struggling firms).
✔ Plan for passive income – Retirees often prefer high-yield stocks for steady cash flow.
Warning: A very high yield (e.g., 10%+) could mean the stock price crashed—always research why!
Factors That Affect Dividend Yield
Dividend yield isn’t static—it changes due to:
- Stock price fluctuations (Yield rises if the stock falls, even if dividends stay the same).
- Dividend cuts/increases (Companies reduce payouts during financial trouble).
- Industry trends (Tech stocks usually have low yields; utilities offer higher ones).
Dividend Yield vs. Dividend Payout
| Metric | Dividend Yield | Dividend Payout Ratio |
|---|---|---|
| What It Measures | Income relative to stock price | % of earnings paid as dividends |
| Example | 4% yield | 60% payout ratio (company keeps 40% as retained earnings) |
Key Takeaway: A sustainable payout ratio (under 75%) is healthier than an unsustainably high yield.