Dividend Yield = Annual Dividend per Share ÷ Share Price
The Short Version
A dividend is a portion of a company's profit paid out directly to shareholders, usually quarterly. Not all companies pay dividends — fast-growing companies often reinvest profits back into the business instead. Dividends can be a sign of a mature, cash-generating business, but a very high dividend can also be a warning sign if it isn't well-supported by earnings.
Explain It Like I'm 10
Think of a family-owned pizza shop that's doing really well. Instead of keeping every dollar of profit to buy new ovens, the family decides to hand a little cash back to everyone who owns part of the shop, just for owning it. That's a dividend — a company sharing a slice of its profit directly with shareholders, usually every three months, just for holding the stock.
Step-by-Step Example
- 1 A stock trades at $100 per share.
- 2 The company pays $3 per share in dividends over the year.
- 3 Divide: $3 ÷ $100 = 0.03, or 3% — that's the dividend yield.
- 4 If you own 10 shares, you'd collect $30 a year just for holding them, separate from any price change.
- 5 Watch out: if the stock price crashed to $30 but the dividend stayed $3, the yield would suddenly look like 10% — that's often a warning sign, not a bargain, since the price likely fell for a reason.
A stock trading at $100 that pays $3 per year in dividends has a dividend yield of 3%.
Quick Recap
- ✓ Payout ratio (covered in Intermediate) shows how much of a company's profit is being paid out as dividends.
- ✓ Dividend 'yield traps' happen when a falling stock price makes the yield look artificially high.