Dividend yield is one of the most common metrics used by income investors to evaluate the cash flow provided by a stock or ETF. It represents the annual dividend income as a percentage of the current share price.
How to Calculate Dividend Yield
The formula is simple: *Dividend Yield = (Annual Dividends per Share) / (Price per Share)*
For example, if a stock costs $100 and pays $4 in dividends annually, its yield is 4%.
Types of Yield
- Trailing Dividend Yield: Based on dividends paid over the last 12 months.
- Forward Dividend Yield: Based on the most recent dividend announcement projected over the next year.
- Yield on Cost: The dividend yield based on your original purchase price, rather than the current market price.
The "Yield Trap" Warning
A high dividend yield is not always a good thing. If a company's stock price crashes due to poor business fundamentals, the yield will mathematically spike. If the company then cuts its dividend to save cash, the high yield disappears, and the investor is left with a capital loss. Always check the Payout Ratio to ensure the yield is sustainable.
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.