What is Indicated Yield?
Indicated yield estimates the annual dividend return of a stock based on its most recent dividend. Indicated yield is a forward looking measure that is calculated by multiplying the most recent dividend by the number of dividends issued each year (producing the indicated dividend), and then dividing by the current share price.
The formula is as follows:
Indicated Yield=Stock Price(MRD)×(# of DPEY)where:MRD=most recent dividend
Indicated yield is usually quoted as a percentage. For example, if Company A's most recent quarterly dividend is $4 and the stock is trading at $100, the indicated yield would be:
Indicated yield of Company A = $4 x 4 ÷ $100 = 16%
Understanding Indicated Yield
Indicated yield is an easy way to forecast the dividend value of a stock relative to its price. Dividend distributions are usually quoted in terms of the dollar amount each share receives (such as 25 cents per share). For an investor considering a stock based on its income potential, it is far easier to compare it against similar offerings using dividend yield rather than the cents it pays per share.
- Indicated yield takes a company's most recent dividend and uses that figure to forecast the dividend yield into the next year.
- Indicated yield works best as a forecasting method when there has been relative stability in the stock price and dividend amounts.
- An investor's confidence in indicated yield will be influenced by a company's public statements on changes to dividend payments and any indication of the permanence of the change.
The dividend yield gives an investor a percentage showing the annual payout relative to the value of the stock. For example, a $5 stock with a 20 cent quarterly dividend will show an annual yield of 16%, while a $30 stock paying an 80 cent quarterly dividend has 10.6% annual yield. So even though the 80 cent dividend is numerically larger, the dividend value for the cost of the investment is lower. If a dividend is consistent month-to-month and year-to-year, then there will be no difference between its trailing 12-month dividend yield and its indicated yield. If, however, the dividend fluctuates over the course of a year or there is an update to the dividend policy, then the indicated yield and the trailing yield will diverge.
Using Indicated Yield Versus Trailing Dividend Yield
There are different ways to look at dividend yield. A trailing dividend yield looks at the past 12 months of dividends to calculate the dividend yield. For companies with a history of consistent dividends and a stable stock price, the trailing yield and indicated yield will be essentially the same. However, if a company changes its dividend, there are cases where one or the other may be a more accurate valuation technique.
For example, when a stock has adjusted its dividend upwards or downwards in the most recent quarter and indicated the new level will be held for the foreseeable future, then the indicated yield may provide a more accurate picture of the new dividend level because it is not burdened by three quarters of historical data. Alternatively, if a stock has a spotty record on dividends but pays one in quarters where there is excess capital after all bills have been paid, then the trailing 12 month dividend yield will likely provide a more realistic picture compared with the indicated yield immediately after a quarter where a dividend has (or has not) been distributed. In the case of a non-payment quarter, the indicated yield would be 0% while the trailing 12 month dividend yield would show a positive yield.
Limitations to the Indicated Yield
That said, trailing dividend yield and indicated dividend yield both perform better as value measures when the stock in question has some stability in terms of price and dividend amount. If a stock's dividend changes by a significant amount without a consistent direction up or down, then indicated yield will vary just as widely, while a trailing 12 month dividend yield will provide a more realistic view. If a dividend is going consistently up or down, then the indicated yield will be slightly more accurate. On its own, however, indicated yield does not offer any real indication of whether the trend will slow, continue, or accelerate.
When it is a stock's price that is fluctuating significantly, dividend yields become a very hard thing to accurately measure. In this case, both the trailing yield and indicated yield would have to be smoothed by using average prices over a period, adding complexity to the calculations. Generally speaking, a stock will not make the cut for investors looking to harvest income off a dividend portfolio if it is experiencing significant shifts in its share value. A certain stability in share price has to be evident before evaluating a stock based on its trailing or indicated dividend yields.