The Dividend Yield represents how much a firm pays in annualized dividends relative to its current share price.
It measures the amount of cash flow an investor receives for each dollar invested in a stock. In the absence of capital appreciation, the dividend yield is effectively the return on investment for a stock.
This metric is represented as a percentage and the formula is shown in Figure 1.
Figure 1: Dividend Yield Calculation
(Current Dividend Payment * Frequency of Payment) / Current Stock Price
Sources: New Constructs, LLC
To properly calculate dividend yield, one must ensure the current dividend payment includes only regular, recurring dividends. Failing to adjust for items such as special dividends can result in an erroneous dividend yield.
Once an accurate dividend yield has been established, one can begin to discern the safety and growth potential of a firm’s dividend using other metrics we provide, such as: economic earnings, free cash flow, dividend increases in the last decade, and consecutive years of dividend increases.