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Concept
Dividend yield
Summary
The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage.
Dividend yield is used to calculate the earning on investment (shares) considering only the returns in the form of total dividends declared by the company during the year.
Its reciprocal is the price/dividend ratio.
Dividend payments on preferred stocks ("preference shares" in the UK) are set out in the prospectus. The name of the preferred share will typically include its
nominal yield relative to the issue price: for example, a 6% preferred share. However, the dividend may under some circumstances be passed or reduced.
The current yield is the ratio of the annual dividend to the current market price, which will vary over time.
Some preferred stock issues are callable at a future date, a feature that provides the issuer an option to buy back the shares, starting at a given future call date, at a given call price. These factors are stated in the issuing prospectus. The yield to call figure for such a stock is the effective current yield calculated on the assumption that the issuer will exercise the call contingency immediately on the call date, returning the call price to the share owner. The yield to call is implicitly a current measure of a future value, accounting for the difference between the call price that will apply in the future versus the current market price. Since the current market price may be above or below the call price, the yield to call may be below or above the current yield, respectively.
For callable preferred stocks, the yield to worst is the lesser of the current yield and the yield to call. Yield to worst represents the minimum of the various yield measures, across the returns resulting from various contingent future events. This amounts to the worst case outcome from the investor's position.
Official source
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