What Is Dividend Yield? Why Is It Important? (2024)

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Dividend investing is a great way to ensure a steady stream of income from your investment portfolio. Dividend-bearing assets pay you on a regular basis no matter if your investments are gaining ground or in the red.

Understanding dividend yield and how it works is the key to perfecting your dividend strategy so you can properly compare investment options.

Dividend Yield Definition

Dividend yield is a ratio that shows you how much income you earn in dividend payouts per year for every dollar invested in a stock, a mutual fund or an exchange-traded fund (ETF).

To put it another way, dividend yield is a security’s annual dividend payment expressed as a percentage of its current price. This percentage yield tells you what your annual return on investment would be at the price you paid for the security.

Thanks to the power of compounding, reinvesting your dividends—rather than cashing them out—can significantly boost your returns, which is another reason why understanding how dividend yield works is so important.

A high dividend yield can be appealing since you’re getting more income per dollar invested, but a high yield isn’t always a positive thing. It could mean that the company’s stock price has been falling or dividend payments have been increasing at a higher rate than the company’s earnings.

How to Calculate Dividend Yield

To calculate dividend yield, divide the total annual dividend amount of a stock or fund in dollars by the price per share.

Dividend Yield = Dividends Per Share / Price Per Share

Let’s say a public company’s share price is $50, and it pays annual dividends equal to $1.50 per share. To determine the dividend yield, divide the dividend amount per share by the price per share: $1.50 / $50 = 0.03.

Convert the decimal to a percentage, and you get a dividend yield of 3%. That means you would earn 3% in dividends per year from an investment in the company’s stock at this price—assuming the dividend payout remained unchanged.

You can find out what dividends the company paid per share by visiting the company’s investor relations page and reviewing its financial statements. You can also see the dividend history of major companies on the Nasdaq dividend history tool.

To simplify your calculations, look at the annualized dividend payouts. You can usually find that information in the company’s annual report (10-K filing), its most recent dividend payout statement or using the trailing dividend method, where you add up the four most recent quarterly dividends to determine the annual dividend.

What Affects Dividend Yield?

There are many factors that impact dividend yield, like overall market conditions, individual stock and fund prices, and company performance.

Stock Prices

The biggest factor impacting dividend yield is a company’s stock price. When share prices rise, dividend yields fall—unless companies choose to boost dividend payouts.

A declining dividend yield due to a higher stock price isn’t necessarily a bad thing. It could mean that investors are more confident in the company and view it as a better investment. And the appreciation you gain from a rising stock price can offset a lower dividend yield.

Industry Trends

When evaluating dividend yields, it’s important to compare the yields offered by companies in the same industry—or funds in the same category—since yields can vary greatly across sectors, industries and fund categories.

On the table below, we compare the average dividend yield for each stock market sector in December 2019, just before the Covid-19 pandemic struck, and in December 2020, almost a year after the pandemic had upset the global economy.

SectorDecember 2020December 2019




Consumer Discretionary



Consumer Staples









Health Care






Information Technology






Real Estate






Some sectors, like consumer discretionary stocks, saw big declines in average dividend yields. With Americans quarantined at home and only spending on essentials, discretionary goods companies earned less and lowered their dividends.

Other sectors, such as energy stocks, saw higher average dividend yields. Disruptions to the global economy increased the price of energy, raising profits for oil and gas companies, which passed the gains on to their investors in the form of higher dividends.

Company Growth

Generally speaking, older, larger companies that are well established and have steady performance are more likely to pay dividends—and have higher dividend yields—than newer, smaller companies.

Growth stocks that are expanding exponentially and rapidly growing their earnings and revenues choose to reinvest profits rather than pay dividends. Dividend investors are much less likely to devote their portfolios to growth stocks for that reason.

Company Fundamentals

High dividend yields can be attractive, but sometimes they can be a sign that a company is facing problems. A higher yield can occur when the stock price falls due to a decrease in the company’s earnings or because of declining investor sentiment.

In some cases, struggling companies may increase dividends to boost yields and attract new investors. However, unless the company is able to turn itself around and continue to support elevated payouts, its dividends may not be sustainable.

What Is a Good Dividend Yield?

Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock’s yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

If you’re retired or you are approaching retirement age, you may be looking to build a portfolio of income-generating assets. Investors in this camp prefer dependable, sustainable dividend yields for the long term. Check out the dividend aristocrats, which are companies that have increased their annual dividend payments for at least 25 consecutive years.

Younger investors with longer time horizons may be less interested in dividend stocks or income investing. They might focus more on growth stocks, with the potential for price appreciation over time, and be better off with growth stocks.

Pay Attention to Dividend Yield

The dividend yield can play an important role in evaluating a stock’s return on investment, but it shouldn’t be the only factor you consider when choosing your investments.

To make sure your investments are sound for the long-term, look at dividend yield as part of the big picture, alongside other metrics like performance versus major benchmark indexes and corporate fundamentals.

If you’re focused on dividend investing to get steady cash flow over the long-term, check out our picks for the best dividend stocks.

What Is Dividend Yield? Why Is It Important? (2024)


What Is Dividend Yield? Why Is It Important? ›

Dividend yield is a ratio that shows you how much income you earn in dividend payouts per year for every dollar invested in a stock, a mutual fund or an exchange-traded fund (ETF). To put it another way, dividend yield is a security's annual dividend payment expressed as a percentage of its current price.

Why is dividend yield important? ›

The dividend yield shows how much a company has paid out in dividends over the course of a year. The yield is presented as a percentage, not as an actual dollar amount. This makes it easier to see how much return the shareholder can expect to receive per dollar they have invested.

What is a dividend and why is it important? ›

A dividend is a reward paid to the shareholders for their investment in a company's equity, and it usually originates from the company's net profits. For investors, dividends represent an asset, but for the company, they are shown as a liability.

What is the good dividend yield? ›

Dividend yields over 4% should be carefully scrutinized; those over 10% tread firmly into risky territory. Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.

What is more important dividend rate or yield? ›

Both metrics are important for equities investors. While the dividend rate indicates total expected income, the dividend yield provides more information on the rate of return and can be useful in comparing different income-paying assets. Apple, Investor Relations.

What does the dividend yield reveal? ›

Dividend yield is a stock's annual dividend payments to shareholders expressed as a percentage of the stock's current price. This number tells you what you can expect in future income from a stock based on the price you could buy it for today, assuming the dividend remains unchanged.

What do dividends tell us? ›

Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.

What is a dividend for dummies? ›

A dividend is a portion of a company's earnings that is paid to a shareholder. The most common type of dividend is a cash payout, but some companies will issue stock dividends. Dividends are typically issued quarterly but can also be disbursed monthly or annually.

What is the difference between dividend rate and dividend yield? ›

While dividend yield refers to the percentage of the current stock price of a company paid out as dividend over a year, dividend rate is the amount of money that company pays to its shareholders as dividends on per-share basis.

What happens if a company can't pay dividends? ›

What happens if I can't afford to pay dividends to directors and shareholders? If a shareholder has invested in the company with a view to receiving regular dividend payouts, failing to receive the anticipated return may result in the sale of their shares.

What stock pays the highest dividend yield? ›

10 Best Dividend Stocks to Buy
  • Verizon Communications VZ.
  • Johnson & Johnson JNJ.
  • Philip Morris International PM.
  • Altria Group MO.
  • Comcast CMCSA.
  • Medtronic MDT.
  • Pioneer Natural Resources PXD.
  • Duke Energy DUK.
Apr 8, 2024

How is dividend yield paid out? ›

Dividends, a distribution of a portion of a company's earnings, are generally paid in cash every quarter to shareholders. The dividend yield is the annual dividend per share divided by the share price, expressed as a percentage; it will fluctuate with the price of the stock.

Do you pay taxes on dividends? ›

They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

What are the cons of dividend yield? ›

The following are the disadvantages: In case the dividend data is old or is based on erroneous information, the evaluation of a stock based on this information is incorrect. Sometimes high yield can be misleading since it may indicate a falling stock price instead of an increase in dividend payment.

What are the disadvantages of a high dividend yield? ›

In short, high dividend paying stocks can come with pitfalls. Dividend cuts will always undermine investor confidence, and can quickly push down a company's stock price.

Is dividend yield a good measure? ›

Dividend yield can be useful if you're pursuing a dividend strategy in your investments, especially when comparing stocks within the same sector. But it only explains dividend value in proportion to a company's share price. As share prices fluctuate often, the yield also changes often.

Do you want a low dividend yield? ›

The dividend yield measures how much income has been received relative to the share price; a higher yield is more attractive, while a lower yield can make a stock seem less competitive relative to its industry.

Should I focus on dividends or growth? ›

If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.

What are the benefits of paying high dividends? ›

In addition to providing consistent income, many dividend-paying stocks are in defensive sectors that can weather economic downturns with reduced volatility. Dividend-paying companies also have substantial amounts of cash, and therefore, are usually strong companies with good prospects for long-term performance.

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