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Encyclopedia > Dividend yield

The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. For other uses, see Stock (disambiguation). ... It has been suggested that ex-dividend date be merged into this article or section. ... Market capitalization, often abbreviated to market cap, mkt. ...

Dividend payments on preferred shares are stipulated by the prospectus. The company will typically refer to a preferred share by its initial name which is the yield on its original price — for example, a 6% preferred share. However, the price of preferred shares varies according to the market so the yield based on the current price fluctuates. Owners of preferred shares calculate multiple yields to reflect the different possible outcomes over the life of the security. A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. ...

• current yield is the \$Dividend / Pfd share current price.
• Since the share may be purchased at a lower (higher) cost than its final redemption value, holding it to maturity will result in a capital gain (loss). The annualized rate of gain is calculated using the Present value of a dollar calculation. ('PV' is the current stock price. 'FV' is the redemption value. 'n' is the number of years to redemption. Solve for the interest rate 'r'.) The yield to maturity is the sum of this annualized gain (loss) and the current yield.
• There are other possible yields discussed at Yield to maturity.

The time value of money is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. ... Yield to maturity (YTM) is the yield promised by the bondholder on the assumption that the bond will be held to maturity, that all coupon and principal payments will be made and coupon payments are reinvested at the bonds promised yield at the same rate as invested. ...

Common share dividend yield

Unlike preferred stock, there is no stipulated dividend for common stock. Instead, dividends paid to holders of common stock are set by management, usually in relation to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. Due to the difficulty in accurately forecasting future dividends, the most commonly-cited figure for dividend yield is the current yield which is calculated using the following formula:

$mbox{Current Dividend Yield}=frac{mbox{Most Recent Full-Year Dividend}}{mbox{Current Share Price}}$

For example, take a company which paid dividends totaling \$1 last year and whose shares currently sell for \$20. Its dividend yield would be calculated as follows: $begin{array}{lcl} mbox{Current Dividend Yield} & = & frac{mbox{Most Recent Full-Year Dividend}}{mbox{Current Share Price}} & = & frac{1}{20} & = & 0.05 & = & 5% end{array}$

Rather than use last year's dividend, some try to estimate what the next year's dividend will be and use this as the basis of a future dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Index[1]. It should be noted that estimates of future dividend yields are by definition uncertain.

History

Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher.

Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments. For the band, see 1990s (band). ...

The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some bearish investors as indicative that the market is still overvalued.

Related Reference

• Cohen, R.D. (2002, November) "The Relationship Between the Equity Risk Premium, Duration and Dividend Yield" Wilmott Magazine, pp 84-97.

Dow Industrials

The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%. Linear graph of the DJIA from 1901 until today Logarithmic graph of the DJIA from 1901 until today The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth-century... Year 1932 (MCMXXXII) was a leap year starting on Friday (the link will display full 1932 calendar) of the Gregorian calendar. ...

With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.

S&P 500

In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings[citation needed]. As of 2008, the average dividend yield is around 2% This article does not cite any references or sources. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ...

The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt (see the financing decision). ... Earnings yield is the quotient of earnings per share divided by the share price. ... A Liquidating dividend is a payment of a dividend that exceeds the companys net income. ... The P/E ratio (price-to-earnings ratio) of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive its share price is. ...

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Results from FactBites:

 Dividend yield (197 words) Dividend yield is often referred to simply as yield. The dividend yield usually means the historical dividend yield: the current price divided by the dividend declared in the last financial year. Special dividends should be excluded when calculating the yield.
 Dividend yield - definition of Dividend yield in Encyclopedia (393 words) The dividend yield is a term used among investors in the financial markets as an evaluation of the possible return on an equity investment, such as in the stock market. The dividend yield is the return on a stock purchase in the form of a dividend as a percentage of the price of the stock. The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market.
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