Dividend yield

Dividend yield is a company's annual dividend per share divided by its current share price, usually expressed as a percentage. It relates the income a share has been paying to the cost of buying that share today. Because the share price sits in the denominator, the yield moves whenever the price does: a falling price pushes the yield up even when the dividend has not changed by a penny. A high yield therefore has two possible causes — a generous payout, or a price that has dropped — and the number alone does not say which.

A worked example

A hypothetical company pays a dividend of 5 pence per share each year. With the shares at 100 pence, the yield is 5 divided by 100, or 5 per cent. If the price then falls to 50 pence while the dividend is left unchanged, the yield becomes 5 divided by 50, or 10 per cent. The payout has not improved; only the price has halved.

The yield is calculated from a dividend that has already been declared or paid. It does not say whether that dividend will be maintained, raised, cut or cancelled — a company can reduce its payout to nothing, at which point the yield a buyer actually receives is zero.