Dividend Yield

In one sentence: Dividend yield says how much cash a company pays out each year, as a percentage of the price you would pay for one share.

$\text{Dividend yield} = \frac{\text{Annual dividends per share}}{\text{Price per share}}$

Read it out loud: “Dividend yield equals annual dividends per share, divided by price per share. Dividend yield is a percentage: the cash paid back each year for each dollar of share price. Annual dividends per share are the total payments for one share over one year. Price per share is what one share costs, in dollars per share.”

Before you start

The ideas and signs this page uses, explained from zero. For powers of ten, Greek letters and other notation in general, see Math basics.

Dividend: A dividend is a payment of cash from a company to its shareholders, usually paid out of profit. Many companies pay dividends in equal parts several times a year, for example each quarter. A quarter is three months, so four equal quarterly payments add up to one year’s dividend.
Percentage: A percentage is a number out of 100. 2% means 2 out of every 100, which is 0.02 written as a decimal. To turn a decimal into a percentage, multiply by 100. Dividend yield is usually quoted as a percentage, so the decimal answer is multiplied by 100 at the end.
Share price: A share’s price is the amount you pay to buy one share on the market, measured in dollars per share. The price changes when buyers and sellers change what they are willing to pay. The dividend usually stays the same for a while, so the yield moves whenever the price moves.
Dividing one amount by another: The fraction bar means divide. In $\frac{0.30}{15}$ , the top number is divided by the bottom number. When both numbers are in dollars per share, the units cancel, so the answer is a plain decimal. That decimal is then read as a share of the price.

What each symbol means

Symbol	Meaning
$\text{Dividend yield}$	Dividend yield, the yearly cash payment as a share of the price, written as a decimal or a percentage. Once the dollars cancel it has no unit, so 0.02 is the same as 2%. It is the answer the formula gives.
$\text{Annual dividends per share}$	Annual dividends per share, the total cash the company pays for one share over one year, measured in dollars per share. When a company pays four equal payments in a year, this figure is four times one payment.
$\text{Price per share}$	Price per share, the price you would pay to buy one share today, measured in dollars per share. As the price rises, the same dividend becomes a smaller share of the price, so the yield falls.

The formula piece by piece

$\text{Annual dividends per share}$: Start with the cash paid for one share over a whole year, in dollars per share. This is the income that the owner of each share receives, so it is the top of the fraction.
$\text{Price per share}$: Next, the price of one share, in dollars per share. This is what the owner had to pay to get that income, so it is the bottom of the fraction. Yield compares the income with the cost.
$\frac{\text{Annual dividends per share}}{\text{Price per share}}$: Divide the yearly income by the price. The division shows how many dollars of yearly income come from each dollar paid, and the result can be compared across shares that have very different prices. Multiply by 100 to read it as a percentage.
$\text{Dividend yield} = \frac{\text{Annual dividends per share}}{\text{Price per share}}$: The whole formula in one sentence: the dividend yield equals the annual dividends per share divided by the price per share.

What the formula is doing, and why

Dividend yield tells you the cash return on a share from its dividends alone. If you pay a price and receive dividends over a year, the yield is the cash you get back as a share of what you paid. The formula divides the yearly dividend by the price, so the answer can be read like a percentage return.

Why divide by the price? Two shares can pay the same dividend but cost different amounts. A 0.30 dollar dividend on a 15 dollar share is a bigger return than the same 0.30 dollars on a 30 dollar share. Dividing by the price puts both on the same footing: it shows the share of the price that comes back as cash each year.

Why the yield moves with the price. The dividend is fixed for the moment, so when the price rises, the same dividend is a smaller fraction of the bigger price, and the yield falls. When the price falls, the yield rises, even though the company has paid exactly the same amount.

Why it is not the whole return. Dividend yield ignores any change in the share price. A share can have a high yield and still lose value if its price falls by more than the dividends paid. A share with a low yield can gain value if its price rises. The yield measures only the cash part of the return.

Dividends are paid from a company’s profit or cash, and the company’s board decides the amount. Because the board can raise, lower or stop a dividend, a yield based on last year’s payment may not match the payments to come.

An everyday picture

Think of an apartment that costs 200000 dollars to buy and brings in 6000 dollars of rent each year. Its yield on the price is 6000 divided by 200000, which is 0.03, or 3%. If the price of the same apartment rises to 250000 dollars while the rent stays at 6000 dollars, the yield falls to 2.4%. The rent plays the part of the dividend, and the price of the apartment plays the part of the share price.

Worked example: Dividend yield for Blue Kettle Coffee at 15 dollars per share

Blue Kettle Coffee, the made-up company from the earnings pages, pays a dividend of 0.075 dollars per share each quarter. Its share price is 15 dollars. We want the yearly dividend per share, the dividend yield at 15 dollars, and the yield if the price rose to 20 dollars while the dividend stayed the same.

Find the annual dividend from the quarterly payment. A quarter is one fourth of a year, and the company pays the same amount in each of the four quarters. So four payments of 0.075 dollars add up to the yearly total: $4 \times 0.075\ \text{dollars} = 0.30\ \text{dollars per share}$ .
Divide the annual dividend by the price. The formula takes the yearly income per share and divides it by the price per share: $\text{Dividend yield} = \frac{0.30\ \text{dollars per share}}{15\ \text{dollars per share}} = 0.02$ . The units cancel, which leaves a plain decimal.
Write the yield as a percentage. A percentage is a decimal times 100, so 0.02 becomes $0.02 \times 100 = 2\%$ . This means that each 100 dollars paid for a share returns 2 dollars in dividends over a year.
Find the yield if the price rises to 20 dollars. The dividend is still 0.30 dollars per share, but the price is now 20 dollars, so the division is $\frac{0.30}{20} = 0.015$ , which is 1.5%. The company did not pay more. The same cash is now a smaller share of the higher price.
Check the first answer by multiplying back. A yield of 2% on a 15 dollar price should give back 2% of 15 dollars: $0.02 \times 15 = 0.30$ dollars, which matches the annual dividend. The check confirms that the division was right.

Answer: At 15 dollars per share, Blue Kettle Coffee’s dividend yield is 2%, from 0.30 dollars of dividends per share over the year. If the price rose to 20 dollars with the same dividend, the yield would be 1.5%. These are worked numbers for practice, not a statement about any real company’s payments.

The numbers in this example are recomputed by script every time the site is built.

Common mistakes

Using a single quarterly payment as the annual dividend. 0.075 dollars is one quarter’s payment, and the yearly figure is four times that.
Forgetting to multiply by 100. A yield of 0.02 is 2%, so write it as a percentage when the text asks for one.
Treating a high yield as always a good return. A high yield can come from a price that has fallen sharply, and dividends can be cut or stopped.
Treating the yield as the total return. The yield ignores the change in the share price, so it captures only the cash part of what an owner receives.

Where you will meet it

Stock tables and financial websites, where each company’s yield is listed beside its share price.
Comparing the cash income from two shares that pay different dividends at different prices.
Estimating the yearly cash a shareholder would receive from a holding of a known number of shares.
Comparing a share’s cash income with bond interest or a savings account rate, as one part of a wider reading of the numbers.

Questions people ask

Why does the yield go down when the price goes up?

The dividend stays the same while the price rises, so the same dividend is a smaller percentage of the price. In the example, a rise from 15 dollars to 20 dollars cuts the yield from 2% to 1.5%.

Is a higher dividend yield always better?

No. A high yield can mean the price has fallen sharply, or that the dividend may not last. Yield measures only the cash part of the return, so it is one number to read together with others.

Where does the dividend come from?

It is paid from the company’s profit or cash, and the company’s board decides the amount. Because the board can change it, a past dividend is not a promise about the future.

Price-to-Earnings Ratio: The P/E ratio says how many dollars investors pay today for each dollar of a company’s yearly earnings per share.
Earnings Per Share: EPS says how much profit a company earned for each share of its stock, after the preferred shareholders have been paid their dividends.
Gordon Growth Model: The Gordon growth model says a share is worth its next dividend divided by the gap between the return you want and the rate the dividend grows.