# Dividend Yield

### What is dividend yield?

Dividend yield is the ratio of a company’s annual dividend to its share price. The dividend yield is represented as a percentage and is calculated as follows:

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Depending on the source, the annual dividend used in the calculation could be the total dividends paid during the last financial year, the total dividends paid during the last four quarters or the last dividend multiplied by four. As an alternative to calculate the dividend yield, you can use the dividend yield calculator from Investopedia.

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### Key points to remember

• Dividend yield is the amount of money a company pays to shareholders (over the course of a year) for owning a share of its shares divided by its current price, displayed as a percentage.
• The dividend yield is the estimated one-year yield from an investment in a share based solely on the payment of the dividend. Note that many stocks do not pay dividends.
• Mature companies tend to pay dividends, with companies in the utilities and consumer staples often paying higher dividend yields.
• Real estate investment trusts (REITs), master limited partnerships (MLP) and business development companies (BDC) pay above-average dividends, but dividends from these companies are taxed at a higher rate.
• Higher dividend yields are not always attractive investment opportunities, as its dividend yield may be high due to a fall in the share price.

### Understanding the dividend yield

The dividend yield is an estimate of the dividend yield only of an investment in shares. Assuming that the dividend is not raised or lowered, the return will increase when the stock price drops and fall when the stock price increases. Because dividend yields change with stock prices, it often seems unusually high for rapidly falling stocks.

Since the dividend itself is rarely changed, the dividend yield will increase when the stock price goes down and decrease when the stock price goes up. Certain stock market sectors, such as non-cyclical consumption or public services, will pay an above-average dividend. Newer smaller companies that continue to grow rapidly pay a lower average dividend than mature companies in the same industries.

### Special considerations

In general, mature companies that do not grow very quickly pay the highest dividend yields. Non-cyclical consumer stocks that market basic items or utilities are examples of entire sectors that pay the highest average return.

Although the dividend yield among technology stocks is below average, the rule for mature companies also applies to a sector like this. For example, in November 2019, Qualcomm Incorporated (QCOM), an established telecommunications equipment manufacturer, paid a dividend with a return of 2.74%. Meanwhile, Square, Inc. (SQ), a new mobile payment processor, paid no dividends.

The dividend yield may not tell you much about the type of dividend the company pays. For example, the average dividend yield in the market is the highest among real estate investment trusts (REITs) such as public storage (PSA). However, these are the ordinary dividend yields, which are a little different from the most common qualified dividends.

In addition to REITs, Master Limited Partnerships (MLPs) and Business Development Corporations (BDCs) also have very high dividend yields. These companies are all structured in such a way that the US Treasury forces them to pass on most of their income to their shareholders. The pass-through process means that the business does not have to pay tax on distributed profits as a dividend, but the shareholder must treat the payment as “ordinary” income on their taxes. These dividends are not “eligible” for the tax treatment of capital gains.

The higher tax liability on ordinary dividends decreases the effective return earned by the investor. However, after adjusting for taxes, REITs, MLPs and BDCs continue to pay dividends with above-average returns.