How to Calculate Dividend Yield

dividend yield

We may earn money or products from the companies mentioned in this post.

Most investors have probably heard of the dividend yield of a company. Commonly referred to as the current yield, this financial ratio is a way to measure the cash flow an investor will get for each dollar they invest in a given security. You could also think of this calculation as the return on investment (ROI) you would receive (in dividends) by purchasing a stock at the current share price.

The dividend yield for a company can be found on any investment website that provides financial data for companies. Investors can also find this information on a company’s website or can calculate the ratio themselves.

How to Calculate the Dividend Yield

The dividend yield of a stock can be calculated by dividing the annual dividends paid out by the current share price, as seen by the equation below.

Dividend Yield = Annual Dividends / Current Share Price

If company ABC is currently trading at $20 per share and has paid $1.00 in dividends over the past 12 months, the stock would be yielding 5.0%. The result of 5% was found by plugging in the annual dividend payments and the current share price into our equation, which is highlighted below.

ABC’s Current Yield = $1.00 Annual Dividends / $20 current share price

How to Use the Dividend Yield

In our previous equation, we found out that an investor who purchases shares of ABC at the current share price of $20 can expect to see a return on investment of 5% in dividends. While this ratio gives us plenty of useful information, it does not tell the whole story of the actual yield. There are several factors to consider when using the dividend yield of a stock.

First, since the share price is constantly moving up and down for a stock during a given trading period, the current yield fluctuates as well. For example, let us say that shares of ABC saw a recent spike in share price and rose to $25. Assuming the annual dividend has not changed, the new dividend yield of the stock dropped to 4% ($1 / $25) from 5%. On the other hand, if the stock price suddenly drops, the yield could shoot up above 5%.

The second thing to consider with the current yield is how annual dividends are paid. Most yield calculations use dividends paid to shareholders during the past 12 months. As we all know, the past is not necessarily an indication of the future. A stock with a sporadic dividend past could suddenly cut their distribution sending the current yield spiraling down. You certainly don’t want to be caught with a stock that decides to make one of these cuts.

Using the dividend yield of a stock can be very helpful to identify potential investments. However, once an investor purchases shares of the stock, the current ratio becomes irrelevant to the investor. Since the investor paid a specific price for the stock, it will no longer represent the current share price and will not give a true picture of their return on investment in the future. An alternative ratio that can help in this case is known as the yield on cost.

The ROI discussed above only represents the dividend payments received and does not consider any capital gains or losses.

Final Thoughts

The dividend yield is a simple financial ratio that represents a company’s potential cash return on investment. It can be used to help investors select quality income stocks. Investors who use this calculation should recognize any potential flaws in the numbers and factor it into their investment decisions.

Note – The dividend yield is included as one of our 8 steps for selecting dividend stocks. In order for a stock to be a candidate for the Money Sprout Index, it must have a current yield >= 2.5%.

Do you use dividend yield in your stock selection criteria? If so, what percentage yield do you look for?

Ready To Reach Financial Independence?

Sign up below and join others who've taken the first steps to grow their income, save more of their hard earned cash, and grown their net worth.


Click Here to Leave a Comment Below 5 comments
Yield on Cost Definition | The Money Sprout - January 19, 2011

[…] investing, the yield on cost (YOC) is an important ratio used by income investors. Similar to the dividend yield ratio, the YOC can show the actual yield of the original investment. This is a useful equation for […]

Reply
How to Calculate Book Value Per Share - March 2, 2015

[…] I screen out companies that have a dividend yield greater than 2.5%. While there are plenty of quality companies with a yield below this value, I am […]

Reply
How to Find the Best Dividend Paying Stocks - March 6, 2015

[…] that we have our list to start, the first step is to set a filter on the dividend yield. I look for stocks that have a current yield that is greater than […]

Reply
How to Calculate Yield on Cost for Dividend Stocks - March 27, 2015

[…] of the filters I use in my stock selection process is to look for companies with a current yield greater than 2.5%. Any company paying below that value will automatically be filtered out of my […]

Reply
Tracking Our Future Dividend Income - May 28, 2015

[…] the current yield is no guarantee for future dividends, so I am making the assumption it will be the same. In […]

Reply

Leave a Reply: