A forward dividend yield is an estimation of a year’s dividend expressed as a percentage of the current stock price. The year’s projected dividend is calculated by annualizing a stock’s most recent actual dividend payment. This value is obtained by dividing a year’s worth of future dividend payments by a stock’s current share price.
Key Takeaways
- A forward dividend yield is the percentage of a company’s current stock price expected to be paid out as dividends over the upcoming 12 months.
- It’s particularly useful in circumstances where dividend yield is predictable based on historical patterns.
- When future dividend payments are unpredictable, trailing yields, which indicate past 12 month’s yield, are used instead.
Understanding a Forward Dividend Yield
Consider a company that pays a Q1 dividend of $0.25. Assuming the dividend remains consistent, the firm will pay $1.00 in dividends over the year ($0.25 x 4 quarters). If the stock price is $10, the forward dividend yield is 10% ([(1/10) x 100]).
In contrast, a trailing dividend yield reflects a company’s actual dividend payments relative to its share price over the past 12 months. When future dividend payments are unpredictable, the trailing dividend yield can help gauge value. However, when future payments are predictable or pre-announced, the forward dividend yield provides a more accurate tool.
A notable variant is the “indicated yield,” which is calculated by multiplying the most recent dividend by the number of annual dividend payments and dividing the result by the current share price.
$$ \text{Indicated Yield} = \frac{(\text{MRD}) \times (# \text{of DPEY})}{\text{Stock Price}} \[ \text{where: MRD} = \text{Most recent dividend DPEY} = \text{Dividend payments each year} ] $$
Let’s say a stock trading at $100 has a most recent quarterly dividend of $0.50. The indicated yield would be:
$$ \text{Indicated Yield of Stock ABC} = \frac{0.50 \times 4}{100} = 2% $$
Forward Dividend Yields and Corporate Dividend Policy
A company’s board of directors sets its dividend policy. Generally, mature and established companies issue dividends, while younger, rapidly growing firms reinvest excess profits into research, development, and expansion. Common dividend policies include:
- Stable Dividend Policy: aligns with long-term growth goals, considering earnings fluctuations.
- Constant Dividend Policy: based on a fixed percentage of the company’s earnings annually.
- Residual Dividend Policy: pays out remaining earnings after covering capital expenditures and working capital needs.
What Is a Good Dividend Yield?
Typically, a dividend yield between 2% and 6% is considered good. Yields above 6% can be higher-risk investments. As of March 10, 2022, the average dividend yield for the S&P 500 is 4.29%, with the current yield being 1.42%.
What Is a Good P/E Ratio?
A higher P/E ratio suggests investors are willing to pay a higher share price now, anticipating future growth. The average P/E ratio of the S&P 500 is 15.97, while the current ratio is 24.29.
Does Tesla Pay Dividends?
No, Tesla does not pay dividends and has no plans to do so in the future. The company prefers to reinvest retained earnings to fuel its growth.
Related Terms: Trailing Dividend Yield, Indicated Yield, Dividend Policy, Earnings, Volatility, Dividend Payments.
References
- Yahoo Finance. “What Is a Good Dividend Yield”.
- Multpl. “S&P 500 Dividend Yield”.
- Multpl. “S&P 500 PE Ratio”.
