How to Calculate Dividend Yield on a Stock

Dividend yield is one number that tells you how much cash a stock pays you each year compared with the price you pay for one share. It is shown as a percent. A 4% dividend yield means that for every $100 you put into the stock, the company pays you $4 a year in dividends. A 1% yield means $1 a year for every $100. Higher yields can sound better. But they sometimes signal trouble at the company, so the number is one piece of the puzzle, not the whole answer.

The formula is short. You take the total dividends a company has paid in the past 12 months, divide by the current share price, and then multiply by 100 to turn it into a percent. For example, if a company has paid $2 in dividends over the last year and one share costs $50 today, the yield is $2 divided by $50, which is 0.04, multiplied by 100 to get 4%. You do not have to do this math yourself in most cases. Every brokerage website and every free finance website like Yahoo Finance, Google Finance, and MarketWatch shows the dividend yield right next to the share price.

Knowing how to do the math by hand still helps for two reasons. First, the websites sometimes show different numbers because they use different time periods. One site may use the last 12 months of dividends, another may guess the next 12 months based on the most recent quarterly payment. Doing the math yourself with a number you trust gives you a sturdier answer. Second, you can compare two stocks fairly when you know the math. If you see one stock at 3% and another at 6%, the higher one pays twice as much cash for every dollar you invest. But you also want to ask why before you decide.

A few rules of thumb help when looking at yields. Yields between 2% and 5% are common for steady, well-known American companies like Procter & Gamble or Johnson & Johnson. Yields above 7% should make you cautious. A very high yield often means the share price has dropped because investors expect the company to cut the dividend soon, and a cut can leave you with both lower income and a lower share price. Yields under 1% usually mean the company prefers to grow the business or buy back its own shares rather than pay cash to shareholders. None of these is automatically good or bad. Match the yield to your own goals, and ask a financial advisor if you are not sure.