Dividend yield
Encyclopedia
The dividend yield or the dividend-price ratio on a company stock
is the company's total annual dividend
payments divided by its market capitalization
, or the dividend per share, divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.
. The name of the preferred share will typically include its yield at par: for example, a 6% preferred share. However, the dividend may under some circumstances be passed or reduced. The yield is the ratio of the annual dividend to the current market price, which will vary.
("ordinary shares" in the UK). Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. The historic yield is calculated using the following formula:
For example, take a company which paid dividends totaling $1 per share last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows:
The yield for the S&P 500 is reported this way. US newspaper and web listings of common stocks apply a somewhat different calculation: they report the latest quarterly dividend multiplied by 4 divided by the current price. Others try to estimate the next year's dividend and use it to derive a prospective dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Indexhttp://www.ftse.com/Indices/UK_Indices/Downloads/ukdividend_factsheet.pdf. Estimates of future dividend yields are by definition uncertain.
The trailing dividend yield is done is reverse by taking the last dividend annualized divided by the current stock price.
The dividend yield is related to the earnings yield
via:
Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.
The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some investors as indicative that the market is still overvalued.
, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred in 1932 when it yielded over 15%, which was years after the famous stock market collapse of 1929, when it yielded only 3.1%.
With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.
The Dogs of the Dow is a popular investment strategy which invests in the ten highest dividend yield Dow stocks at the beginning of each calendar year.
earnings
increased slower than stock prices. During the 20th century, the highest growth rates for earnings
and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
is the company's total annual dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
payments divided by its market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
, or the dividend per share, divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.
Preferred share dividend yield
Dividend payments on preferred shares ("preference shares" in the UK) are set out in the prospectusProspectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
. The name of the preferred share will typically include its yield at par: for example, a 6% preferred share. However, the dividend may under some circumstances be passed or reduced. The yield is the ratio of the annual dividend to the current market price, which will vary.
Common share dividend yield
Unlike preferred stock, there is no stipulated dividend for common stockCommon stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
("ordinary shares" in the UK). Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. The historic yield is calculated using the following formula:
For example, take a company which paid dividends totaling $1 per share last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows:
The yield for the S&P 500 is reported this way. US newspaper and web listings of common stocks apply a somewhat different calculation: they report the latest quarterly dividend multiplied by 4 divided by the current price. Others try to estimate the next year's dividend and use it to derive a prospective dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Indexhttp://www.ftse.com/Indices/UK_Indices/Downloads/ukdividend_factsheet.pdf. Estimates of future dividend yields are by definition uncertain.
Forward dividend yield
Forward dividend yield is a measure of estimating the future yield of a stock. The calculation is done by taking the first dividend payment and annualizing it and then divide that number by the current stock price. In other words if the first quarterly dividend was $0.04 and the current stock price was $10.00 the forward dividend yield would be (.04*4)/10= 1.6%.The trailing dividend yield is done is reverse by taking the last dividend annualized divided by the current stock price.
Related measures
The reciprocal of the divided yield is the Price/Dividend ratio.The dividend yield is related to the earnings yield
Earnings yield
Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio.The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates.-Applications:...
via:
- earnings yield = dividend yield · dividend coverDividend coverDividend cover is the ratio of company's earnings over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share...
, and - dividend yield = earnings yield · dividend payout ratio.
Desirability
Historically, a higher dividend yield has been considered to be desirable among many investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher. Some investors may find a higher dividend yield attractive, for instance as an aid to marketing a fund to retail investors, or maybe because they cannot get their hands on the capital, which may be tied up in a trust arrangement. In contrast some investors may find a higher dividend yield unattractive, perhaps because it increases their tax bill.Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.
The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some investors as indicative that the market is still overvalued.
Related reference
- Cohen, R.D. (2002, November) "The Relationship Between the Equity Risk Premium, Duration and Dividend Yield" Wilmott Magazine, pp 84–97.
Dow Industrials
The dividend yield of the Dow Jones Industrial AverageDow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred in 1932 when it yielded over 15%, which was years after the famous stock market collapse of 1929, when it yielded only 3.1%.
With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.
The Dogs of the Dow is a popular investment strategy which invests in the ten highest dividend yield Dow stocks at the beginning of each calendar year.
S&P 500
In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public companyPublic company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
earnings
Earnings
Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...
increased slower than stock prices. During the 20th century, the highest growth rates for earnings
Earnings
Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...
and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings
See also
- Cost of capitalCost of capitalThe cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds , or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities"...
- Dividend payout ratio
- Earnings yieldEarnings yieldEarnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio.The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates.-Applications:...
- Liquidating dividendLiquidating dividendA liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...
- P/E ratioP/E ratioThe P/E ratio of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share...