What is a dividend yield?
In finance, a dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. Dividend yield is a way to measure how much cash flow an investor is getting for each dollar invested in an equity position.
It is a popular practice of comparing stocks in retrospective, as it tells what the company paid out last year, but not what it might pay out the next. Most of the time, a low yield suggests a fast-growing company not yet making much profit.
A high yield can indicate either a very risky or slow-growing company. Investors will expect a high yield to compensate the risk that they are taking or they will accept a low yield now in exchange for an anticipated high yield in the future.
Types of dividend yield:
- Trailing dividend yield: it gives the dividend percentage paid over a previous period, usually one year. A trailing 12-month dividend yield (TTM), includes every dividend paid during the past year in order to calculate the dividend yield. The trailing dividend is an indicator that should be taken cautiously, because it can be misleading as it does not account for dividend increases or decreases, nor does it account for a special dividend that may not occur.
- Forward dividend yield: it is an estimation of the future yield of a stock. This may be an analyst estimate, or just using the company’s guidance. Say that a company has forecasted a dividend increase; even though nothing has been paid, this may be assumed to be next year’s payment. On the other hand, if a company has announced that it will suspend its dividend, the yield would be considered to be zero.
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Category: Financial Glossary