What is a Forward Dividend Yield?
A forward dividend yield is an estimation of a year's dividend expressed as a percentage of the current stock price. The year's projected dividend is measured by taking a stock's most recent actual dividend payment and annualizing it. The forward dividend yield is calculated by dividing a year's worth of future dividend payments by a stock's current share price.
- A forward dividend yield is the percentage of a company's current stock price that it expects to pay out as dividends over a certain time period, generally 12 months.
- Forward dividend yields are generally used in circumstances where the yield is predictable based on past instances.
- If not, trailing yields, which indicate the same value over the previous 12 months, are used.
Introduction To Dividend Yields
Understanding Forward Dividend Yields
For example, if a company pays a Q1 dividend of 25 cents, and you assume the company's dividend will be consistent, the firm will be expected to pay $1.00 in dividends over the course of the year. If the stock price is $10, the forward dividend yield is 10%.
The opposite of a forward dividend yield is a trailing dividend yield, which shows a company's actual dividend payments relative to its share price over the previous 12 months. When future dividend payments are not predictable, the trailing dividend yield can be one way to measure value. When future dividend payments are predictable or have been announced, the forward dividend yield is a more accurate tool.
An additional form of dividend yield is the indicated yield or the dividend yield that one share of stock would return, based on its current indicated dividend. To calculate indicated yield, multiply the most recent dividend issued by the number of annual dividend payments (the indicated dividend). Divide the product by the most current share price.
Indicated Yield=Stock Price(MRD)×(# of DPEY)where:MRD=Most recent dividend
For example, if a stock trading at $100 has a most recent quarterly dividend of $0.50, the indicated yield would be:
Indicated Yield of Stock ABC=$100$0.50×4=2%.
Forward Dividend Yields and Corporate Dividend Policy
A company’s board of directors determines the dividend policy of the company. In general, more mature and established companies issue dividends, while younger, rapidly growing firms often choose to put any excess profits back into the company for research, development, and expansion purposes. Common types of dividend policies include the stable dividend policy, in which the company issues dividends when earnings are up or down.
The goal of a stable dividend policy is to align with the firm’s goal for long-term growth instead of its quarterly earnings volatility. With a constant dividend policy, a company issues a dividend each year, based on a percentage of the company's earnings. With constant dividends, investors experience the full volatility of company earnings. Finally, with a residual dividend policy a company pays out any earnings after it pays for its own capital expenditures and working capital needs.