Types of Dividend Yield
There are four primary categories of dividend yield, organized by their calculation methods and investor perspectives: Dividend Yield on Cost, Trailing Dividend Yield, Forward Dividend Yield, and Indicated Dividend Yield.
Main Categories
- Dividend Yield on Cost — calculated by dividing the annual dividend payment by the investor's initial purchase price, providing insight into the return on investment for the shareholder, as seen in the case of Coca-Cola, which has consistently paid dividends to its shareholders.
- Trailing Dividend Yield — determined by dividing the total dividend payments made over the past 12 months by the current stock price, offering a snapshot of the company's recent dividend performance, such as Johnson & Johnson, which has a history of stable dividend payments.
- Forward Dividend Yield — estimated by dividing the projected annual dividend payment by the current stock price, giving investors an idea of the potential future return, as with Procter & Gamble, which has a strong track record of increasing its dividend payout.
- Indicated Dividend Yield — calculated by dividing the most recent quarterly dividend payment, annualized, by the current stock price, providing a timely indicator of a company's dividend yield, as exemplified by 3M, which regularly reviews and adjusts its dividend payout.
Comparison Table
| Category | Calculation Method | Investor Perspective | Risk Level |
|---|---|---|---|
| Dividend Yield on Cost | Annual dividend / Initial purchase price | Long-term investment | Low |
| Trailing Dividend Yield | Total dividend payments over 12 months / Current stock price | Recent performance | Medium |
| Forward Dividend Yield | Projected annual dividend / Current stock price | Future potential | High |
| Indicated Dividend Yield | Most recent quarterly dividend, annualized / Current stock price | Timely indicator | Medium |
How They Relate
The categories of dividend yield often overlap or are commonly confused, particularly between Trailing Dividend Yield and Indicated Dividend Yield, as both provide a snapshot of a company's recent dividend performance, but differ in their calculation methods. Forward Dividend Yield and Dividend Yield on Cost are also related, as the forward yield can influence an investor's decision to purchase a stock, thereby affecting their yield on cost. Additionally, Indicated Dividend Yield can be used as a proxy for Forward Dividend Yield when forward estimates are not available, but this may not always accurately reflect the company's future dividend payments, as seen in the case of General Electric, which has adjusted its dividend payout in response to changing market conditions.