Dividend Yield for Valuing Equity

  • A classic metric for valuing a stock.

Dividend Yield = Annual Dividend per Share / Price per Share

Trailing Dividend Yield = (Recently quarterly dividend per share × 4) / Price per share

  • Leading Dividend Yield: Calculated in the same manner, but forecasted future year dividend payments would be used.

  • Dividend Yield positives:

  • Payments are a key component of a stock's total return.

  • Can be expected with greater certainty than stock price appreciation.

  • Dividend Yield drawbacks:

  • Dividend yield fails to reflect share price appreciation when evaluating a stock's total return potential.

  • Dividends paid in the current period reduce a company's capital available to invest in future growth.

  • The tradeoff between dividends and capital gains can be difficult to evaluate.

  • Not all companies pay dividends.

  • Justifiable Dividend Yield breakdown:

Div0/P0 = (rce - Growth rate of dividend payment) / (1 + g)

  • The yield has a negative relationship with the dividend growth rate.
  • The yield is positively related to the required return on common equity.