Dividend Yield – Definition, Calculation, Formula

Dividend yield shows how much a company pays its shareholders in dividends annually per dollar invested. It reflects how much an investor will earn aside from any capital gains in the stock.

The dividend yield figure is expressed as a percentage. For example, if you own $20,000 of stock of a company with an annual dividend yield of 5%, you would receive $1,000 in dividend payments for the year.

It is a helpful metric because two companies may have the same dividend payout per share but different dividend yields. Imagine company A pays a dividend of $2 per share and is trading at $40 and company B also pays a dividend of $2 per share and is trading at $60.

Company A has a greater dividend yield due to having a lower stock price. The dividend yield reveals the dividend earnings for each dollar invested. From a dividend only perspective, company A is a more attractive investment, since you are getting the same dividend earnings from a smaller investment.

Dividend yields change and have an inverse relationship to the stock price. The yield rises when the price of the stock falls and falls when the price of the stock rises. Dividend yield allows you to compare the dividend payments of different companies and better evaluate them as investments. This is especially important for income investors, who look for a constant stream of earnings from their stock market holdings.

The dividend yield percentage is determined by dividing the dollar value of dividends paid per share in a year by the dollar value of one share of stock and multiplying that figure by 100. 

The first step in calculating dividend yield is to determine the annual dividend. There are several different methods for estimating the dividend per share of a company for a current year. The company’s previous full annual report will typically list the annual dividend per share. 

The most recent dividend can also be used and multiplied by the number of times the dividend is paid out per year. For example, taking the most recent quarterly dividend and multiplying it by four. Alternatively, to take into account changing dividends, an investor can add up all the dividend payments over the prior year.

Next, you need to divide the annual dividend by the current share price. To get the dividend yield percentage, this figure is multiplied by 100.

Looking at the equation to calculate dividend yield, we can see that it is simple. Dividend yield formula:

Let’s look at the following example. Imagine that a stock with a price of $200 has an annual dividend of $5 per share. The dividend yield for that stock would be (5/200 x 100), equal to 2.5%.

So, if you currently own 500 shares of stock in this company, currently valued at $200, your market position would be worth $100,000 and you would receive $2,500 in annual dividends. (A $5 dividend for each of the 500 shares.)

Now, imagine that the stock price rises to $300 per share. The dividend yield for the stock drops to 1.6% (5/300 x 100 = 1.6). We can see the dividend yield fall as the stock becomes more expensive.

Next, let’s consider what happens if the price of the stock drops to $100. We see the dividend yield become more appealing at a heftier 5% (5/100 x 100 = 5).

Keep in mind dividends are not set in stone. Companies sometimes pay out additional ‘special dividends’ while sometimes dividends are also reduced.

When researching stocks you don’t need to do the calculation yourself. You can refer to financial websites such as this one to see the dividend yield, which is listed along with other key data points such as P/E Ratio and Earnings Per Share (EPS) when you look up a stock. For example, in the image below you can see the dividend yield listed for Duke Energy.

1. Reliable stream of passive income, even during periods of market instability. Dividends get paid whether the market is moving up or down. They provide a form of insulation from the volatility and unpredictability of the market. Dividends create a situation where you are getting paid to wait for your stock market investment to appreciate. 
2. A largely dependable source of income. Procter & Gamble (PG) has paid a dividend every year since 1891. In addition, well-established companies that pay dividends usually increase their dividend payouts over time. For example, in April of 2021, IBM increased its quarterly dividend by a cent to $1.64 per share, marking 26 consecutive years of rising dividends. Making long-term investments in high-quality companies paying dividends is arguably a better strategy than trying to time the market, which is notoriously difficult. 
3. Hedge against inflation. As prices are lifted by inflation, profits are also boosted, and companies can afford to increase their dividend payments.
4. Dividends can be reinvested for compounding returns. By reinvesting dividends in more shares, you increase your potential earnings from future dividends, which in turn allows you to buy even more shares. The powerful force of compounding was recognized by Albert Einstein, who said: “Compound interest is the eighth wonder of the world.” 
5. There are tax benefits associated with earnings from dividends. For example, in the United States, the IRS allows qualified dividends to be taxed at a lower capital gains rate.

1. Earnings may be somewhat capped. Dividend-paying stocks typically see less price appreciation than growth stocks. Growth investors focused on young, small companies have the potential for earning unusually large gains. So while dividend-paying stocks can provide healthy and consistent gains, they are unlikely to generate the massive returns that would have been achieved for example by buying Tesla (TSLA) in 2011. 
2. Dividends that are being paid to investors limit the potential growth of a company and subsequently hinder the stock price from rising. The money that is paid to shareholders can no longer be used to reinvest in the company itself.
3. Companies can cut or eliminate their dividend payments at any time. An extreme example is the financial crisis of 2008, when many major banks either reduced or cut their dividend payouts entirely. When evaluating a stock, it is advisable to check the history of the dividend yield for stability and consistency. 
4. Investors should be careful to not be lured into buying a stock based on a high dividend yield alone. Dividend yield will rise as the price of a stock falls. If the price of the stock is in a downtrend it could continue to fall and on top of that, there is the risk that the dividend could be cut or cancelled. Gains from a high dividend yield could easily be wiped out by the losses from a tumbling share price.
5. Earnings are taxed twice by the government. As part owners of the company, shareholders pay a first round of tax when the company pays taxes on its earnings. The second round of tax is based on the dividend earnings received by shareholders, from the company’s after-tax earnings. In this way, there is a double taxation.

Yes, the dividend yield percentage is based on the annual dividend of a stock. 

Dividend yields of 2% to 6% are considered good.

Yes, the dividend yield percentage is constantly changing, because it uses the stock price in its formula.

Qualified dividends are dividends from shares which have been held for a set minimum time period.  

Qualified dividends are taxed at long-term capital gains rates, while non-qualified dividends are taxed at ordinary income rates. Stock dividends are not taxed as they are earned if they are in a retirement account.

When dividends are paid, the cash is automatically deposited into your brokerage account.

Companies in the telecommunications, energy, healthcare, utilities, consumer staples, financial and real estate industries tend to have the best dividend yields.