Dividend Yield Calculator

Yield is a ratio, and the denominator moves

Annual dividend divided by share price. Because price is the denominator, yield rises when the price falls — with no change to the dividend at all. A stock whose yield jumped from 3 to 9 percent has usually not tripled its payout; it has lost two thirds of its price. Screening for high yield without asking why it is high selects for exactly the companies in trouble.

The yield trap

A yield far above sector peers is a market signal that the dividend is not believed to be sustainable. The share price has already fallen in anticipation of a cut, and buying for the historic yield frequently means collecting one more payment before the cut arrives and the price falls further. Checking the payout ratio and free cash flow matters more than the yield itself.

Payout ratio shows the margin of safety

Dividends divided by earnings. Below 60 percent is generally comfortable for an ordinary company; above 100 percent means the dividend exceeds earnings and is being funded from reserves or borrowing, which cannot continue indefinitely. REITs and utilities legitimately run higher, and for REITs distribution is a statutory requirement, so the sector norm matters more than the absolute figure.

Forward, trailing and the difference

Trailing yield uses the past twelve months of actual payments. Forward yield uses the expected next twelve months, which is an estimate. A company that has just announced a cut still shows an attractive trailing yield, which is why trailing figures on screening sites mislead precisely when it matters most.

Yield on cost is a different measure

Dividing the current dividend by your original purchase price gives yield on cost, which rises over time with dividend growth. It describes your position's history and says nothing about whether to buy more today — that decision uses the current yield, which is what the market is offering now.

Growth can beat yield over long horizons

A 2 percent yield growing 10 percent a year overtakes a static 5 percent yield in about twelve years, and keeps going. Dividend growth rate and payout sustainability tend to matter more than starting yield for anyone with a long holding period.

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