Dividend Yield
Definition
The annual dividend payment divided by the stock's current price, expressed as a percentage. A stock paying $2 in annual dividends at a $50 price has a 4% dividend yield.
Dividend yield measures the income return on a stock investment relative to its price. It answers the question: "If I buy this stock today, what percentage of my investment will I receive back as dividends over the next year?"
Dividend yield is calculated as: Annual Dividends Per Share / Current Stock Price x 100. A company paying $3 in annual dividends with a stock price of $100 has a 3% yield. If the stock price drops to $75 (and dividends stay the same), the yield rises to 4% — an important relationship to understand.
This inverse relationship between price and yield means that high-yield stocks aren't always bargains. A rising yield can indicate a falling stock price due to business problems, with the risk that the company will cut its dividend. This is called a "yield trap" — the high yield lures investors into a declining company.
Dividend-paying stocks serve specific portfolio roles: income generation for retirees, total return enhancement through reinvestment, and potential inflation protection (many companies increase dividends annually). The "dividend aristocrats" are S&P 500 companies that have increased dividends for 25+ consecutive years.
Dividends are taxed differently depending on whether they're "qualified" (lower capital gains rates) or "ordinary" (regular income rates). Most dividends from US companies held for more than 60 days qualify for the lower rate. REIT dividends are typically taxed as ordinary income.
Where this appears in Clarity
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Related Terms
Frequently Asked Questions
Is a higher dividend yield always better?
Not necessarily. Extremely high yields (above 6-8%) often signal that the market expects a dividend cut, which typically accompanies a declining stock price. Look for companies with moderate yields, growing dividends, and sustainable payout ratios below 60-70% of earnings.
How are dividends taxed?
Qualified dividends (most US stock dividends held 60+ days) are taxed at long-term capital gains rates (0%, 15%, or 20%). Non-qualified/ordinary dividends are taxed at your regular income rate. Dividends in retirement accounts like IRAs are not taxed until withdrawal.