Dividend yield

The formula

• y = 100 · D / P

D is the dividend paid per share over a year and P the share price. The percentage is the cash return on the money a share costs today, before any rise or fall in the price itself.

A worked example

A dividend of 6 per share on a share priced at 150: y = 100 · 6 / 150 = 4%. Turned round, a share paying 6 that the market prices at a yield of 3% trades at 200, and a share at 150 yielding 4% pays 6.

The yield moves with the price

The dividend is set once a year; the price moves every day. When a share falls from 200 to 150 with the same dividend, the yield rises from 3% to 4% without the company having done anything, and a high yield is as often a fallen price as a generous board. A yield well above the market’s calls for a look at whether the dividend can be kept.

Yield and payout

The yield is the dividend against the price; the payout ratio is the dividend against the profit. A 4% yield from a payout of 40% of earnings is a different thing from a 4% yield paid out of 110% of earnings, which the company is borrowing to pay. The two together, with the P/E ratio, describe the share: y = payout / P/E.

Common mistakes

• Using a single quarterly dividend. D is a year’s worth.
• Counting a one-off special dividend as the yield. It will not be paid next year.
• Reading yield as total return. The price change is left out on purpose, and can be larger either way.

Frequently asked questions