## What Is Dividend Yield?

The dividend yield is the ratio of a company's annual dividend compared to its share price. The dividend yield is represented as a percentage and is calculated as follows:

﻿$\textit{Dividend Yield}\ = \ \frac{\textit{Annual Dividend}}{\textit{Share Price}}$﻿

Depending on the source, the annual dividend used in the calculation could be the total dividends paid during the most recent fiscal year, the total dividend paid over the past four quarters, or the most recent dividend multiplied by four. As an alternative for calculating the dividend yield, you can use Investopedia's dividend yield calculator.

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### Key Takeaways

• The dividend yield is the amount of money a company pays shareholders (over the course of a year) for owning a share of its stock divided by its current stock price—displayed as a percentage.
• The dividend yield is the estimated one-year return of an investment in a stock-based only on the dividend payment. Note that many stocks do not pay dividends.
• Mature companies tend to pay dividends, with companies in the utility and consumer staple industries often paying higher dividend yields.
• Real estate investment trusts (REITs), master limited partnerships (MLPs), and business development companies (BDCs) pay higher than average dividends, but the dividends from these companies are taxed at a higher rate.
• Higher dividend yields aren’t always attractive investment opportunities, as its dividend yield could be elevated due to a declining stock price.

## Understanding Dividend Yield

The dividend yield is an estimate of the dividend-only return of a stock investment. Assuming the dividend is not raised or lowered, the yield will rise when the price of the stock falls, and it will fall when the price of the stock rises. Because dividend yields change with the stock price, it often looks unusually high for stocks that are falling quickly.

Because the dividend itself is changed infrequently, the dividend yield will rise when the share price falls and decline when the share price rises. Some stock sectors, like consumer non-cyclical or utilities, will pay a higher-than-average dividend. Small, newer companies that are still growing quickly pay a lower average dividend than mature companies in the same sectors.

## Special Considerations

In general, mature companies that aren't growing very quickly pay the highest dividend yields. Consumer non-cyclical stocks that market staple items or utilities are examples of entire sectors that pay the highest average yield.

Although the dividend yield among tech stocks is lower than average, the rule about mature companies applies to a sector like this as well. For example, in Nov. 2019, Qualcomm Incorporated (QCOM), an established telecommunications equipment manufacturer, paid a dividend with a yield of 2.74%. Meanwhile, Square, Inc. (SQ), a new mobile payments processor, paid no dividends at all.

The dividend yield may not tell you much about what kind of dividend the company pays. For example, the average dividend yield in the market is highest among real estate investment trusts (REITs) like Public Storage (PSA). However, those are the yields from ordinary dividends, which are a little different than the more common qualified dividends.

Along with REITs, master limited partnerships (MLPs) and business development companies (BDCs) also have very high dividend yields. These companies are all structured in such a way that the U.S. Treasury requires them to pass through most of their income to their shareholders. The pass-through process means the company doesn't have to pay income taxes on profits distributed as a dividend, but the shareholder has to treat the payment as "ordinary" income on his or her taxes. These dividends are not "qualified" for capital gains tax treatment.

The higher tax liability on ordinary dividends lowers the effective yield the investor has earned. However, adjusted for taxes, REITs, MLPs, and BDCs still pay dividends with a higher-than-average yield.