Dividend Yield for Valuing Equity

• A classic metric for valuing a stock.

Dividend Yield = Annual Dividend per Share / Price per Share

Trailing Dividend Yield = (Recently quarterly dividend per share × 4) / Price per share

• Leading Dividend Yield: Calculated in the same manner, but forecasted future year dividend payments would be used.

• Dividend Yield positives:

• Payments are a key component of a stock's total return.

• Can be expected with greater certainty than stock price appreciation.

• Dividend Yield drawbacks:

• Dividend yield fails to reflect share price appreciation when evaluating a stock's total return potential.

• Dividends paid in the current period reduce a company's capital available to invest in future growth.

• The tradeoff between dividends and capital gains can be difficult to evaluate.

• Not all companies pay dividends.

• Justifiable Dividend Yield breakdown:

Div0/P0 = (rce - Growth rate of dividend payment) / (1 + g)

• The yield has a negative relationship with the dividend growth rate.
• The yield is positively related to the required return on common equity.