Dividend yield
The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage.
Dividend yield is used to calculate the earning on investment (shares) considering only the returns in the form of total dividends declared by the company during the year.
Its reciprocal is the Price/Dividend ratio.
Dividend payments on ("preference shares" in the UK) are set out in the prospectus. The name of the preferred share will typically include its nominal yield: for example, a 6% preferred share. However, the dividend may under some circumstances be passed or reduced. The current yield is the ratio of the annual dividend to the current market price, which will vary.
Unlike preferred stock, there is no stipulated dividend for ("ordinary shares" in the UK). Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. The historic yield is calculated using the following formula:
For example, take a company which paid dividends totaling $1 per share last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows:
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