Dividend Yield: What It Tells You and What It Hides

If you only learn one number in dividend investing, it’ll be the yield. It’s printed next to every stock and fund, it’s the first thing people quote, and it’s the number most likely to lead a new investor into trouble. Let’s make sure you know exactly what it measures, and what it doesn’t.

The formula

Dividend yield is the yearly dividend divided by the share price. It tells you how much income you’d get each year, as a percentage of what you pay for the shares today.

That last line is the useful one. A yield is just a quick way to compare income across investments of any price. A $500 stock and a $20 stock can be compared directly once you convert both to yields.

Forward yield vs trailing yield

There are two common ways to count the “annual dividend” in that formula, and websites don’t always say which they use.

When a company has just raised its dividend, the forward yield is more accurate because the trailing figure still includes the old, smaller payments. When a fund’s payments jump around from month to month, the trailing figure is often more honest, because a forward yield built from one unusually large payment can look wildly high.

Special dividends cause the biggest distortions. If a company paid a one-off $5 special last year, its trailing yield will look terrific right up until that payment drops out of the twelve month window. For funds, there are even more versions of yield to untangle; that’s covered in SEC Yield, Distribution Rate and Trailing Yield.

Yield moves the opposite way to the price

This is the part that catches people out. Because the price is on the bottom of the fraction, yield goes up when the price goes down, even if the company hasn’t changed its dividend at all. Play with the numbers below and watch the curve.

Two things are worth noticing. First, a falling price makes the yield look better while your actual income stays exactly the same. Second, try adding a dividend cut. A stock whose price has fallen 40% often yields “8%” right before a cut, and only 4% right after. The high number on the screen was never something you would actually have received.

What’s a normal yield?

It depends enormously on what you’re looking at. Rough ranges for US investments:

Here’s what some of those look like today, live from Dividend Duel’s data, alongside how each did in total return:

Look at the last two columns together. Some of the highest yields come with share prices that have gone down, sometimes a long way. A yield only describes the income. Whether the investment actually made you money is a different question, answered by Total Return: Why the Dividend Is Only Half the Story.

Why a very high yield is a question, not a gift

Markets aren’t perfect, but they aren’t stupid either. If one company in an industry yields 11% while its competitors yield 3% to 4%, the market is telling you something. Usually it’s one of these:

• Investors expect the dividend to be cut, and the price has already fallen to reflect it.
• The business is shrinking, so today’s dividend won’t last.
• The company is borrowing or selling assets to keep paying.
• It’s a fund paying out more than it earns and slowly handing back your own money.

Sometimes the market is too gloomy, and a high yielder turns out fine. But you should always be able to explain why a yield is high before you buy it. That habit alone will keep you out of most Yield Traps.

A note on yield on cost

You’ll also hear people talk about their yield on cost: this year’s dividend divided by the price they originally paid. If you bought a stock at $20 years ago and it now pays $2 a year, your yield on cost is 10%, even if new buyers only get 3%. It’s a nice way to see how a growing dividend rewards patience, and we use it in Dividend Growth Investing. Just remember it describes your past, not the investment’s value today.