Dividend Yield
Dividend yield is the annual dividend a stock pays per share divided by its current share price, expressed as a percentage. It tells an investor how much cash income a share returns relative to its market price, independent of any capital gain. Yield rises when the price falls and falls when the price rises, so it is a quick gauge of a stock's income return at today's price.
Worked example
A stock trades at $50 and pays an annual dividend of $2.00 per share. Dividend yield = annual dividend ÷ share price = $2.00 ÷ $50 = 0.04 = 4%.
Why it matters
Dividend yield helps income-focused investors compare the cash return of different shares at a glance. The common pitfall is the "yield trap": an unusually high yield often reflects a falling share price rather than generosity, and may signal that the market expects the dividend to be cut. Always check whether the payout is sustainable before chasing a high yield.
Frequently asked questions
Is a higher dividend yield always better?
Not necessarily. A very high yield can be a warning sign that the share price has dropped because investors expect the dividend to be cut. A moderate, well-covered yield is often more reliable than an extreme one.
What is the difference between dividend yield and payout ratio?
Dividend yield compares the dividend to the share price, measuring income return. The payout ratio compares the dividend to earnings, measuring how much profit is being distributed.
Related terms: Payout Ratio, Dividend Reinvestment (DRIP)