Dividend yield

Dividend yield is often referred to simply as yield, because it is the measure of yield commonly used for ordinary shares. It is the rate of return investors get from holding the share.

For hybrids such as prefs it is essentially flat yield. For ordinary shares it is a measure of the return to shareholders that was actually paid out as dividends. The PE ratio and measures the total returns to shareholders, and the payout ratio the relationship between total returns and what was paid out. There are alternatives to both these numbers

Dividend yield is total dividends per share for the year and divided by the share price. For example, if a share pays out 20p in dividends over the course of a year and trades at 500p, then it has a dividend yield of 4%.

The dividend yield usually means the historical dividend yield: the current price divided by the dividend declared in the last financial year. Forward looking numbers are used as well, but should be specifically identified as such.

Special dividends should be excluded when calculating the yield. So if the company in the example above had also paid a 100p special dividend during the year, its yield would still be 4%.

Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower yield. Many fast growing companies do not have a dividend yield at all because they do not pay out dividends.

Simple financial theory suggests that dividends are irrelevant for valuation, which is not entirely true.

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