Dividend Yield

A stock's annual dividend expressed as a percentage of its current share price — a measure of the income return an investor earns relative to what they paid.

Dividend yield is calculated by dividing the annual dividend per share by the current stock price. If a stock pays $4 per year in dividends and trades at $80, the yield is 5%. The yield fluctuates continuously as the stock price changes: if the stock falls to $60 while the dividend stays at $4, the yield rises to 6.67%.

A high dividend yield can be attractive or alarming depending on context. A high yield from a rising dividend and a stable stock price is generally positive. A high yield from a sharply falling stock price is a "yield trap" — the market may be signaling that the company is in financial distress and the dividend is at risk of being cut. When a company cuts its dividend, the stock often falls dramatically, eliminating the apparent yield advantage.

Dividend yield is most usefully compared to other income-producing alternatives: if 10-year Treasury yields rise above the average dividend yield of the stock market, dividend-paying stocks lose some of their relative attractiveness. This relationship between equity dividend yields and bond yields is one factor that influenced the dramatic equity selloff of 2022 as the Fed raised rates.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.