Dividend Yield

Dividend yield is the annual dividend per share divided by the current share price, expressed as a percentage. It measures the cash return you collect from dividends alone, before any change in the stock price.

The math

A company paying 3 dollars per share on a 100 dollar stock yields 3 percent: 3,000 dollars a year on a 100,000 dollar position. If the price drops to 75 dollars and the dividend holds, new buyers get 4 percent.

	Before the drop	After the drop
Share price	$100	$75
Annual dividend	$3.00	$3.00
Yield for a new buyer	3.0%	4.0%

That is the detail most people miss: yield moves mechanically with price, so a rising yield often just means a falling stock.

The trap

The highest yields in the market are usually broken promises in waiting. A 9 percent yield frequently means the market has already priced in a dividend cut: the payment looks generous right up until it is halved, and the investor loses the income and the capital at the same time.

Screening by “highest yield” is one of the most reliable ways to collect tomorrow’s dividend cuts.

The move

Treat yield as a starting point, never a verdict. Check the payout ratio (is the dividend consuming more than 60 to 80 percent of earnings?), then check free cash flow (is real cash covering the payment, with room to spare?).

A 2.5 percent yield growing 10 percent a year usually ends up paying you far more than a static 6 percent yield, and with much better odds of surviving a recession.