what is the dividend yield 
the dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price the reciprocal of the dividend yield is the total dividends paid net income which is the dividend payout ratio investopedia michela buttignolunderstanding dividendsbefore we jump into looking at the dividend yield let s briefly explore dividends dividends are payments made by a corporation to its shareholders usually derived from the company s profits these payments represent a portion of the company s earnings that is distributed to its investors as a reward for their ownership dividends can be issued in various forms including cash payments additional shares of stock or other property the most common form is cash dividends which is what this article focuses on companies that generate consistent and stable profits may be more likely to pay regular dividends in contrast companies in high growth phases may prefer to reinvest profits back into the business rather than distribute them to shareholders the dividend policy can therefore provide insights into a company s financial health and management s confidence in future earnings a company s dividend history also provides insights into management s future plans i e reinvest for growth or reward current investors absolute dividend dollars may not tell the entire story for example two companies may each issue a 1 quarterly dividend and have the exact same market capitalization however if one company s stock is valued at 100 and the other s is valued at 300 one company is paying significantly more relative to what the company may be worth for this reason it s worth now moving into the dividend yield understanding the dividend yieldthe dividend yield is an estimate of the dividend only return of a stock investment assuming the dividend is not raised or lowered the yield will rise when the price of the stock falls conversely it will fall when the price of the stock rises because dividend yields change relative to the stock price it can often look unusually high for stocks that are falling in value quickly new companies that are relatively small but still growing quickly may pay a lower average dividend than mature companies in the same sectors in general mature companies that aren t growing very quickly pay the highest dividend yields in some cases the dividend yield may not provide that much information about what kind of dividend the company pays for example the average dividend yield in the market can be very high amongst real estate investment trusts reits however those are the yields from ordinary dividends which are different than qualified dividends in that the former is taxed as regular income while the latter is taxed as capital gains along with reits master limited partnerships mlps and business development companies bdcs typically can also have very high dividend yields the structure of these companies is such that the u s treasury requires them to pass on the majority of their income to their shareholders this is referred to as a pass through process and it means that the company doesn t have to pay income taxes on profits that it distributes as dividends a high dividend yield may not always be great for example a company may be better off retaining cash to expand its company so investors are rewarded with higher capital gains via stock price appreciation calculating the dividend yieldthe formula for dividend yield is as follows dividend yield annual dividends per share price per share begin aligned text dividend yield frac text annual dividends per share text price per share end aligned dividend yield price per shareannual dividends per share the dividend yield can be calculated from the last full year s financial report alternatively investors can also add the last four quarters of dividends which captures the trailing 12 months of dividend data using a trailing dividend number is acceptable but it can make the yield too high or too low if the dividend has recently been cut or raised because dividends are paid quarterly many investors will take the last quarterly dividend multiply it by four and use the product as the annual dividend for the yield calculation this approach will reflect any recent changes in the dividend but not all companies pay an even quarterly dividend some firms especially outside the u s pay a small quarterly dividend with a large annual dividend if the dividend calculation is performed after the large dividend distribution it will give an inflated yield finally some companies pay a dividend more frequently than quarterly a monthly dividend could result in a dividend yield calculation that is too low when deciding how to calculate the dividend yield an investor should look at the history of dividend payments to decide which method will give the most accurate results advantages and disadvantages of dividend yieldshistorical evidence suggests that a focus on dividends may amplify returns rather than slow them down for example according to analysts at hartford funds 69 of the total returns from the s p 500 are from dividends this assumption is based on the fact that investors are likely to reinvest their dividends back into the s p 500 which then compounds their ability to earn more dividends in the future note that any historical statistics about dividends may not be reflective of dividends in the future a company s ability to consistently pay and increase dividends is often a strong indicator of its financial health and stability companies that generate sufficient profits and cash flow are more likely to distribute dividends to their shareholders therefore a stable or growing dividend yield can be a signal that a company is in good financial standing regular dividend payments can also boost shareholder confidence signaling that management is confident in the company s future prospects and earnings potential this consistent payout demonstrates that the company generates sufficient profits to share with its shareholders not only is this another signal of good financial health it can be an indicator that management has a plan for the future and believes it does not need cashflow for future success high dividend yields may be attractive but they may also come at the expense of the potential growth of the company it can be assumed that every dollar a company is paying in dividends to its shareholders is a dollar that the company is not reinvesting to grow and generate more capital gains even without earning any dividends shareholders have the potential to earn higher returns if the value of their stock increases while they hold it as a result of company growth it s not recommended that investors evaluate a stock based on its dividend yield alone dividend data can be old or based on erroneous information many companies have a very high yield as their stock is falling if a company s stock experiences enough of a decline it may reduce the amount of the dividend or eliminate it investors should exercise caution when evaluating a company that looks distressed and has a higher than average dividend yield because the stock s price is the denominator of the dividend yield equation a strong downtrend can increase the quotient of the calculation dramatically may amplify returnsindicates company s financial strengthboosts shareholder and management confidencemay stunt growthmay be reduced or eliminated when times get toughdowntrend can increase dividend quotientdividend yield vs dividend payout ratio