Dividend Yield

Dividend yield is the annual dividend divided by the current share price. A $50 stock paying $2 a year yields 4%. Like a deposit rate, it answers what percentage you receive in dividends alone if you buy at today's price.

There is a trap built into the formula. The denominator is the share price, so if the dividend stays flat while the price halves, the yield doubles. An 8% yield on screen may reflect a collapsing price rather than a generous company, and what usually follows is a dividend cut.

So when a yield looks unusually high, check why the price fell, whether the payout ratio is sustainable, and whether the company has held or raised its dividend over the past five to ten years. The real appeal of dividends is not a big number but a payment that does not stop.

Timing matters too. You must be on the shareholder register by the record date to receive a dividend, and on the ex-dividend date the share price naturally drops by roughly the dividend amount. Buying just to collect the payout and selling immediately does not produce free money.