Dividend Yield (also see Dividend section)

Is the amount a company annually pays, per share, for one’s investment in that share. It is expressed as a percentage:

Dividend yield = Annual Dividend per share / share price x 100%

Note this is the gross (no tax deducted) dividend.

Assuming the dividend remains the same if the share price rises, the dividend yield falls, and vice versa. The dividend yield, even if attractive, should not be the sole consideration when evaluating an investment in the company. A share may have a high dividend yield because the share price has fallen, and indeed may continue to fall, due to other considerations such as the profitability of the company. The result may be the dividend is cut or even cancelled.

At TEAM, we subscribe to the mantra: “If it looks too good to be true it normally is.”

The dividend yield is an estimate of the dividend-only return of an investment. It is a component of total return. However, investors use dividend yield together with dividend discount models (DDM) to help estimate the future share price. DDM’s are a quantitative method of predicting a share price based on the present-day share price being worth the sum of all future dividends discounted back at an appropriate rate. See separate section on DDM.

Dividend yield is the reciprocal of dividend payout ratio.

Many investors, often those close to, or in retirement, gravitate towards high dividend yielding shares. In a zero-interest rate world this has become an increasing trend. For many,

dividends

provide a consistent and hopefully rising income stream, almost disregarding how the stock market or share price performs. But dividends can become a burden to companies at the expense of growth. Dividends can, on occasion altogether disappear.

High dividend shares can be traps. We need to understand much more and why?

Go Back