Dividend yield explained
Dividend yield is the annual dividend divided by the share price. See the formula, trailing vs forward yield, and why yield rises when a share price falls.
- Yield = annual dividend per share ÷ share price × 100.
- Trailing yield uses the past 12 months of payments; forward yield annualizes the current rate.
- A falling price raises the yield on paper without raising anyone’s income.
- Yield on cost uses your purchase price instead of today’s price, so it answers a different question.
What is the dividend yield formula?
Dividend yield = annual dividend per share ÷ current share price × 100.
Take a hypothetical Company B that pays $0.50 per share each quarter. Its annual dividend is $2.00. If the shares trade at $50.00, the yield is $2.00 ÷ $50.00 = 0.04, or 4.0%. That means a $10,000 position would generate about $400 of dividends a year at the current rate, before tax: $10,000 × 4% = $400.
Yield is useful because it lets you compare income across companies with very different share prices. A $0.50 dividend on a $10 share (5%) is a bigger income stream per dollar invested than a $2.00 dividend on a $100 share (2%).
Why does yield move when the dividend doesn’t?
Price sits in the denominator. Hold Company B’s $2.00 dividend constant and watch what happens as the share price changes:
| Share price | Calculation | Yield | Income on 100 shares |
|---|---|---|---|
| $62.50 | $2.00 ÷ $62.50 | 3.2% | $200 |
| $50.00 | $2.00 ÷ $50.00 | 4.0% | $200 |
| $40.00 | $2.00 ÷ $40.00 | 5.0% | $200 |
| $25.00 | $2.00 ÷ $25.00 | 8.0% | $200 |
The owner of 100 shares receives $200 a year in every row. Only the quoted yield changes. A yield that jumps because the price fell is a signal to investigate, not a raise. The yield traps guide explains why.
Trailing yield vs forward yield
Different sources compute the “annual dividend” differently, which is why two websites can show two yields for the same company on the same day.
- Trailing (TTM) yield adds up the dividends actually paid over the last 12 months.
- Forward (indicated) yield takes the most recent regular payment and annualizes it: quarterly × 4, monthly × 12.
- Suppose Company B’s last four quarterly payments were $0.45, $0.45, $0.50 and $0.50 after a mid-year increase.
- Trailing dividend: $0.45 + $0.45 + $0.50 + $0.50 = $1.90. At $50.00, trailing yield = $1.90 ÷ $50.00 = 3.8%.
- Forward dividend: $0.50 × 4 = $2.00. At $50.00, forward yield = $2.00 ÷ $50.00 = 4.0%.
- Neither is wrong. Forward yield reflects the latest rate; trailing yield reflects what was actually paid. After a cut, forward yield drops immediately while trailing yield lags for up to a year.
What about special dividends and monthly payers?
A one-time special dividend can distort trailing yield. If Company B also paid a $1.50 special dividend last year, a trailing calculation would show ($1.90 + $1.50) ÷ $50.00 = 6.8%, which overstates the recurring income. Many investors strip specials out before comparing. See special dividends.
For monthly payers, annualize the monthly amount by 12. A $0.10 monthly distribution on a $15.00 unit is $1.20 a year, or an 8.0% yield. Payment frequency changes the timing of cash, not the yield. See monthly vs quarterly dividends.
How is yield on cost different?
Yield on cost divides today’s annual dividend by the price you paid. If you bought Company B at $40.00 and it now pays $2.00 a year, your yield on cost is $2.00 ÷ $40.00 = 5.0%, even though the current yield at $50.00 is 4.0%.
Yield on cost can be a satisfying way to track how your income has grown, but it says nothing about whether the shares are a good use of capital today. A new buyer only gets the current yield. See yield on cost explained or try the yield-on-cost calculator.
How do you work out the yield of a whole portfolio?
A portfolio’s yield is total annual income divided by total value, not the simple average of each holding’s yield. Larger positions count for more.
| Holding | Value | Yield | Annual income |
|---|---|---|---|
| Company P | $10,000 | 3.0% | $300 |
| Company Q | $15,000 | 4.0% | $600 |
| Company R | $5,000 | 6.0% | $300 |
| Portfolio | $30,000 | $1,200 ÷ $30,000 = 4.0% | $1,200 |
The simple average of 3%, 4% and 6% is 4.33%, which overstates the portfolio’s yield because the 6% holding is the smallest. Weighting by value gives the correct 4.0%.
How to compare yields fairly
- Use the same definition for every company: all trailing or all forward.
- Strip out special dividends before comparing recurring income.
- Use prices from the same date, since yields shift as prices move.
- Compare within an industry first; business models that pay out more of their cash naturally yield more.
- Look at each yield beside its payout ratio and dividend history, not alone.
What yield doesn’t tell you
- Safety: a high yield can reflect a share price that fell because the market doubts the dividend. Check the payout ratio and free cash flow.
- Growth: a 2% yield growing quickly can out-earn a 5% yield that never grows, under some assumptions. See dividend growth investing.
- Total return: yield ignores price changes. A 6% yield with a 10% price decline is a loss. See total return vs dividend yield.
- After-tax income: the same yield can leave very different amounts in your pocket depending on country and account. See the tax hub.
Frequently asked questions
Is a higher dividend yield better?
Why do websites show different yields for the same stock?
Does dividend yield include share price growth?
How do I turn a yield into an income estimate?
Education, not advice. This site does not recommend, rate or rank any security and does not know your full situation. Check tax details with the CRA or IRS, or a qualified professional. Read the disclaimer.