Written byA dividend yield is the annual dividend per share divided by the current share price, shown as a percentage so income can be compared across shares.
Also known as: dividend yield ratio, yield on shares, gross dividend yield
Key points
- The sum is annual dividends per share divided by share price: a $1 dividend on a $25 share is a 4% yield.
- Yield moves with the share price, so a falling price lifts the yield even when the dividend itself has not changed.
- A very high yield is often a warning sign that the market expects a cut, or that the company is under pressure.
- Quoted yields may be trailing, covering the last 12 months, or forecast, so check which one you are looking at before comparing.
- Grossed-up yields add franking credits, which makes a franked Australian share look higher yielding than an unfranked one paying the same cash.
How dividend yield works
Dividend yield turns a payment into a rate you can compare. Add up the dividends a company paid over the last 12 months, divide by today's share price, then multiply by 100. A share paying $1.20 a year at a price of $30 yields 4%.
Because the price sits on the bottom of the sum, the yield changes every day even though the dividend itself only moves once or twice a year. A shareholder who bought years ago may be earning far more on the original outlay than the quoted yield suggests, which is why some people track yield on cost across their portfolio as well.
Using yield to compare shares
Yield is a starting point, not a verdict. Two shares can quote the same yield while one pays out almost everything it earns and the other pays out half, which says very different things about how safe the payment is. The payout ratio is worth checking beside it.
Income investors tend to look at yield across a whole holding rather than share by share, and weigh it against what a term deposit or bond pays. The ATO taxes the dividends behind the yield as income, so the after-tax result matters more than the headline percentage.
What yield does not tell you
Yield says nothing about whether a payment will continue. A company can hold its dividend steady while earnings fall, which pushes the payout ratio up and makes a cut more likely later. It says nothing about the share price either, and a high yield is cold comfort if the price has halved.
It is also not income a lender takes at face value. Dividend income counts towards serviceability on a home loan only where there is a consistent record, and most Australian lenders apply their own discount to it.
Example
Priya compares two Australian shares. Share A trades at $40 and paid $1.60 in dividends over the year, a 4% yield. Share B trades at $12 and paid 96 cents, an 8% yield. Share B looks better until Priya checks the payout ratios and sees that Share B handed over nearly all its earnings while Share A paid out about half. A month later Share B trims its dividend, and the quoted yield falls with it.
Not to be confused with
- Interest
- interest on a deposit is contracted for the term, while a dividend yield moves with both the share price and the payment
Frequently asked questions
What is a good dividend yield?
There is no single number. Yields vary by sector and move with share prices, so a figure that looks generous in one industry can be ordinary in another. Investors usually compare a share's yield with its own history, with its sector, and with what cash and bonds pay.
How do you calculate dividend yield?
Divide the dividends paid per share over the last 12 months by the current share price, then multiply by 100. If a share pays 90 cents a year and trades at $30, the yield is 3%. Forecast yields use expected dividends instead of past ones.
Why does a high dividend yield sometimes signal trouble?
Because the share price is part of the sum. When a price falls sharply, the yield calculated from last year's dividend jumps even though nothing good has happened. Often the market is anticipating a cut, and the yield settles back once the smaller dividend is declared.
What is a grossed-up dividend yield?
It adds the franking credits attached to a dividend to the cash amount before dividing by the share price. Because those credits can be used against your tax, the grossed-up figure is a fairer comparison between franked Australian shares and unfranked or overseas ones.
Does dividend income count towards a home loan?
Lenders can consider it, but they generally want a consistent record over a couple of years and apply their own discount, because dividends are not contracted payments. Every lender treats investment income differently, so ask how yours assesses it before relying on that income.
Related terms
Shareholder
A shareholder is a person or entity that owns shares in a company, giving them a share of its profits and value while the directors run the business.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionCompany
A company is a separate legal entity, formed under the Corporations Act 2001, that can own property, borrow and be sued in its own name, independently of its shareholders.
Read definitionInterest
Interest is the price of using money: what a borrower pays on a loan, or a saver earns on a deposit, expressed as a percentage rate on the principal.
Read definitionATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionComparison rate
A comparison rate is a single annual percentage that combines a loan's interest rate with most upfront and ongoing fees to show its ongoing cost more clearly.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.