Dividend yield is a financial ratio that measures the annual dividend paid by a company per share relative to its current share price. It is expressed as a percentage and is calculated by dividing the annual dividend per share by the current share price.
Formula:
Dividend yield = (Annual dividend per share / Current share price) * 100
Interpretation:
A high dividend yield generally indicates that a company is distributing a large portion of its profits to shareholders. However, it’s important to note that a high yield can also be a sign of financial distress or a company that is not reinvesting in its growth potential.
Conversely, a low dividend yield indicates that a company is retaining more of its profits for reinvestment, research and development, or other growth initiatives.
Types of Dividend Yields
There are two main types of dividend yields:
1. Forward Dividend Yield:
Calculates the dividend yield based on the estimated future dividends for the next 12 months. It is a prospective metric and can change as a company’s dividend policy or earnings change.
2. Trailing Dividend Yield:
Calculates the dividend yield based on the actual dividends paid over the past 12 months. It is a historical metric and provides a more stable view of a company’s dividend yield.
Importance of Dividend Yield
Dividend yield is an important metric considered by investors for several reasons:
1. Income Generation:
Dividend yield provides investors with a stream of income from their investments.
2. Investment Comparison:
It allows investors to compare the dividend yield of different companies to determine which offers a higher return.
3. Risk Assessment:
A high dividend yield can indicate a high-risk investment, as companies may cut or eliminate dividends during periods of financial distress.
Dividend Yield in 2025 vs. 2023
According to FactSet, the average trailing dividend yield for S&P 500 companies in 2023 was around 1.7%, while it is projected to be around 2.1% in 2025.
Factors Affecting Dividend Yield
Several factors can affect the dividend yield of a company, including:
1. Company’s Earnings:
Companies with consistent and growing earnings are more likely to maintain or increase their dividends over time.
2. Dividend Policy:
Companies have different dividend policies, which dictate their approach to dividend distribution.
3. Interest Rates:
When interest rates are high, investors may prefer bonds with higher yields, which can put downward pressure on dividend yields.
How to Use Dividend Yield
Investors should consider the following when using dividend yield:
1. Company’s Financial Health:
Ensure the company has a strong financial position to sustain dividend payments.
2. Long-Term Growth Potential:
Consider the company’s growth prospects and whether a high dividend yield may be a sign of limited growth potential.
3. Diversification:
Dividend yield should not be the sole factor used to make investment decisions. Diversify investments across different sectors and asset classes.
10 Companies with High Dividend Yields
| Company | Ticker | Dividend Yield (Trailing) |
|---|---|---|
| AT&T | T | 6.6% |
| Verizon Communications | VZ | 5.5% |
| Chevron | CVX | 3.9% |
| Exxon Mobil | XOM | 3.8% |
| Coca-Cola | KO | 2.8% |
| Procter & Gamble | PG | 2.6% |
| Johnson & Johnson | JNJ | 2.5% |
| PepsiCo | PEP | 2.5% |
| Cisco Systems | CSCO | 2.3% |
| Merck & Co. | MRK | 2.2% |
FAQs
1. What is a good dividend yield?
The definition of a “good” dividend yield varies, but yields between 2% and 5% are generally considered reasonable.
2. Should I invest in companies with high dividend yields?
Not necessarily. Consider the company’s overall financial health and growth prospects.
3. How often do companies pay dividends?
Most companies pay dividends quarterly, but some pay monthly, semi-annually, or annually.
4. Can dividend yields change?
Yes, dividend yields can change over time as a company’s earnings, dividend policy, and share price fluctuate.
5. Is dividend yield better than stock price?
Both dividend yield and stock price are important factors to consider when evaluating an investment, but neither is inherently “better.”
6. How can I find dividend yields?
You can find dividend yields on financial websites, investment platforms, and company websites.
7. What are the risks of investing in dividend-paying companies?
The main risks include dividend cuts or eliminations, declining share prices, and interest rate fluctuations.
