Dividend yield

Dividend yield is calculated by dividing the dividends paid per share over a year by the current share price. A trailing yield uses the dividends actually paid over the past twelve months; a forward yield uses the dividends expected over the next twelve months, which are estimates. Because the share price sits at the bottom of the calculation, the yield rises when the price falls and falls when the price rises, even if the dividend itself is unchanged. The same measure is used for funds and indices, where it reflects the combined dividends of the holdings.

Dividend yield is useful for comparing the income from different shares, or with the interest on cash and bonds, but it says nothing about growth or safety. An unusually high yield is often a warning rather than a bargain: it may mean the price has fallen because investors expect the dividend to be cut, a situation sometimes called a yield trap. A low yield is not necessarily bad either, since a company may reinvest its profits or return cash through buybacks. Analysts judge whether a dividend looks sustainable by comparing it with earnings and free cash flow.