Dividend yield (DY)

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A company's dividend yield tells you how much dividend income you would earn for each unit (£1, $1, €1) invested in buying a company's shares.

A company's dividend yield tells you how much dividend income you would earn for each unit (£1, $1, €1) invested in buying a company's shares.

How to calculate dividend yield

It is calculated by dividing its most recent full-year dividend per share by its current share price and then multiplying this by 100. It is expressed as a percentage:

Dividend yield = (Dividends per share/price per share) x 100

For example, a company that paid a dividend per share of £1 for its most recent full year of trading and has a current share price of £10 would have a dividend yield of 10%.

All things being equal, therefore, the higher a company's dividend yield, the more attractive are its shares.

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Dividend yields can be difficult to interpret

All things never are equal of course, and the dividend yield has become a controversial measure of value in recent years as it can be difficult to interpret.

How much importance you attach to the dividend yield will depend on your reason for trading shares.

A high dividend yield could suggest that a stock is currently underpriced and therefore represents a good investment opportunity. Alternatively, it could suggest that the company is now struggling compared with previous periods and that its future dividends will be lower.

A low dividend yield could suggest that a stock is currently overpriced and therefore should be avoided or sold. Alternatively, it could suggest that future dividends will be higher.

How much importance you attach to the dividend yield will depend on your reason for trading shares. If you are a long-term investor who seeks a stable income rather than a big increase in share prices, this will be a key measure for you when making investment decisions.

If you are a short-term trader – for example a CFD trader who takes positions for minutes rather than years or aims to profit by shorting shares – it will be less important to you.

Summary

In this lesson you have learned that ...

  • ... a company's dividend yield tells you how much dividend income you would earn for each unit (£1, $1, €1) invested in buying a company's shares.
  • ... all things being equal, therefore, the higher a company's dividend yield, the more attractive are its shares.
  • ... a high dividend yield could suggest that a stock is currently underpriced and therefore represents a good investment opportunity.
  • ... a low dividend yield could suggest that a stock is currently overpriced and therefore should be avoided or sold.

What next?

To learn about financial health ratios, go to the next module:

Highest dividends and best preferred stocks are waiting for you in EXANTE terminal


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