Dividend Yield

Dividend yield is a stock's total annual dividend payment divided by its current share price, expressed as a percentage — a way of measuring the cash income a share produces relative to its cost.

A stock paying $2 per share in dividends over a year, priced at $50, has a dividend yield of 4%. The same $2 annual dividend on a $100 stock yields only 2%. Same company, same payout, different yield — because yield is a function of price as much as it is of the dividend itself.

The trap in a rising yield

Because price sits in the denominator, dividend yield rises whenever a stock's price falls, even if the dividend itself hasn't changed at all. A stock that drops 50% while holding its dividend steady will show its yield double. That can look like an increasingly attractive income opportunity, but it's often the market pricing in a dividend cut the company hasn't announced yet — the yield is high because the market doubts the payment is sustainable, not because the stock got cheap.

Reading it correctly

A useful dividend yield needs to be read alongside the company's ability to keep paying it — its earnings, its free cash flow, and how large a share of both the dividend already consumes. A yield that looks unusually generous compared to the rest of the market or the company's own history is worth investigating before it's worth celebrating.

• Yield alone says nothing about whether the dividend is safe.
• A falling price can inflate yield without any improvement in the underlying business.
• Compare a company's current yield to its own history, not just to other companies.