when comparing measures of corporate dividends it s important to note that the dividend yield tells you what the simple rate of return is in the form of cash dividends to shareholders 
however the dividend payout ratio represents how much of a company s net earnings are paid out as dividends while the dividend yield is the more commonly used term many believe the dividend payout ratio is a better indicator of a company s ability to distribute dividends consistently in the future the dividend payout ratio is highly connected to a company s cash flow the dividend yield shows how much a company has paid out in dividends over the course of a year the yield is presented as a percentage not as an actual dollar amount this makes it easier to see how much return the shareholder can expect to receive per dollar they have invested dividends can be awarded as additional stock cash or other forms of consideration keep this in mind when calculating the value of dividends received tax considerations of dividendsit d be remiss to talk about dividend yield without highlighting the tax treatment of dividends the tax treatment of dividend income varies significantly across different jurisdictions and can ultimately influence investors net returns for example qualified dividends are taxed in the united states at a lower rate than ordinary income with rates ranging from 0 to 20 depending on the investor s tax bracket this preferential treatment is designed to encourage investment in dividend paying stocks non qualified dividends however are taxed at the individual s regular income tax rate which can be substantially higher the reason this is important to note is that the dividend yield may not ultimately be an investor s rate of return if the taxpayer has a high individual tax rate the investor s true net take home proceeds may be 20 less than the dividend yield just as capital gains can vary based on the retirement vehicle in which they are held dividends and their associated dividend yield may be impacted by taxes dividend yields and inflationdividend yields can serve as an effective hedge against inflation helping investors preserve their purchasing power over time when companies pay dividends they provide a regular income stream that can be particularly valuable during periods of rising prices for instance as a company s revenue grows potentially due to charging higher prices to capture inflationary pressure that growth could be passed along to investors however this is only true when dividend payments increase should a company decide to retain cash flow for growth purposes a stable dividend yield may be unfavorable especially during inflationary periods for instance during the global pandemic when the united states saw unprecedented government stimulus that resulted in high inflation corporations that did not increase their dividend yield actually eroded the purchasing power of those dividends examples of dividend yieldsuppose company a s stock is trading at 20 and pays annual dividends of 1 per share to its shareholders suppose that company b s stock is trading at 40 and also pays an annual dividend of 1 per share this means company a s dividend yield is 5 1 20 while company b s dividend yield is only 2 5 1 40 assuming all other factors are equivalent an investor looking to use their portfolio to supplement their income would likely prefer company a over company b because it has double the dividend yield to calculate the dividend yield for a company like microsoft you would follow these steps 