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Dividend yield: income measured against the share price

Definition of dividend yield, its formula, where to find the dividend in an annual report, the usual range, comparison with its average and the trap of a yield that is too high.

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Definition

Dividend yield divides the annual dividend per share by the share price. It shows what income the shareholder receives each year for each euro invested at today’s price, before tax. Because it depends on the share price, it rises when the price falls, and the reverse, for the same dividend.

Formula

Dividend yield = dividend per share over the last 12 months / share price

Where to find it in an annual report

The dividend per share appears in the management report, in the section on the appropriation of earnings, and on the company’s investor relations page. Add up the interim and final dividends when the dividend is paid in several installments. The share price is today’s.

Common thresholds

Growing dividend: a range, green between 2.5 and 6%, orange between 1.5 and 2.5% or between 6 and 8%, red below 1.5% or above 8%. The same preset strategy also compares the current yield with its 5-year average: green if it is at or above the average, orange up to 10% below it.

In the preset strategies

Preset strategy Criterion met To monitor Criterion not met
Growing dividend Dividend yield 2.5% to 6% 1.5% to 2.5% or 6% to 8% < 1.5% or > 8%
Growing dividend (calculated) Yield against its 5-year average ≤ 0% 0% to 10% > 10%

Pitfalls

  • A very high yield often signals that the market doubts the next dividend: the share price has fallen because a cut is expected.
  • A special dividend inflates the yield for one year: remove it from the calculation.
  • The yield shown does not account for taxation, which depends on the company’s country, your country and the type of account.
  • Comparing the current yield with its average only makes sense if the dividend has followed a steady path over the period.

Where it does not apply

  • Companies that pay no dividend, or that return cash mainly through share buybacks.
  • Companies whose dividend varies sharply with earnings (commodities, shipping): one year’s yield says nothing about the next.

A worked example

A fictitious company, called Company AA here, pays a dividend of €1.80 per share and trades at €45. Its yield is 1.80 / 45 = 4%, in the green zone. The dividend yield and payout ratio calculator does the calculation without an account.

Over five years, its average yield was 3.5%. The gap to the average, (3.5 − 4.0) / 3.5, is about −14%: the current yield is above its average, so the criterion is green. For the same dividend, the share price is lower than usual.

The high yield trap

Another fictitious company shows an 11% yield after a 40% fall in its share price. If its dividend is cut in half the following year, the actual yield falls to 5.5%, and the capital loss remains. That is why the range in the preset strategy turns red above 8%. Always read the yield together with the payout ratio.

Sources