What is Types Of Dividend Yield?
INTRODUCTION
Dividend yield is a crucial concept in investing, representing the ratio of annual dividend payments to the stock's current price. Understanding the different types of dividend yield is essential for investors to make informed decisions about their investment portfolios. Classification of dividend yield types matters because it helps investors identify the characteristics of each type, allowing them to assess the potential risks and returns associated with their investments. By categorizing dividend yields, investors can better navigate the complex world of investing and make more effective choices.
MAIN CATEGORIES
The following are the primary types of dividend yield:
1. Trailing Dividend Yield
- Definition: The trailing dividend yield is calculated by dividing the total dividend payments made by a company over the past 12 months by the current stock price. This type of yield provides a historical perspective on a company's dividend payments.
- Key characteristics: It is based on past dividend payments, providing a backward-looking view of a company's dividend performance.
- Example: If a company paid $1 in dividends over the past year and its current stock price is $20, the trailing dividend yield would be 5%.
2. Forward Dividend Yield
- Definition: The forward dividend yield is estimated by dividing the expected dividend payments for the next 12 months by the current stock price. This type of yield offers a forward-looking perspective on a company's dividend payments.
- Key characteristics: It is based on projected dividend payments, providing an estimate of future dividend performance.
- Example: If a company is expected to pay $1.20 in dividends over the next year and its current stock price is $20, the forward dividend yield would be 6%.
3. Indicated Dividend Yield
- Definition: The indicated dividend yield is calculated by dividing the most recent quarterly dividend payment by the current stock price and then multiplying by 4. This type of yield provides an indication of the current dividend rate.
- Key characteristics: It is based on the latest dividend payment, providing a snapshot of the current dividend yield.
- Example: If a company paid $0.25 in dividends last quarter and its current stock price is $20, the indicated dividend yield would be 5%.
4. Dividend Yield on Cost
- Definition: The dividend yield on cost is calculated by dividing the annual dividend payments by the original purchase price of the stock. This type of yield provides a measure of the return on investment based on the initial purchase price.
- Key characteristics: It is based on the original purchase price, providing a measure of the investment's performance over time.
- Example: If an investor purchased a stock for $10 and the company now pays $0.50 in annual dividends, the dividend yield on cost would be 5%.
COMPARISON TABLE
| Type of Dividend Yield | Calculation | Focus | Example |
|---|---|---|---|
| Trailing Dividend Yield | Past 12 months' dividends / Current stock price | Historical | 5% |
| Forward Dividend Yield | Expected next 12 months' dividends / Current stock price | Future | 6% |
| Indicated Dividend Yield | Latest quarterly dividend * 4 / Current stock price | Current | 5% |
| Dividend Yield on Cost | Annual dividends / Original purchase price | Investment performance | 5% |
HOW THEY RELATE
The different types of dividend yield are interconnected, as they all relate to the dividend payments made by a company. The trailing dividend yield provides a historical context, while the forward dividend yield offers a future outlook. The indicated dividend yield serves as a snapshot of the current dividend rate, and the dividend yield on cost measures the investment's performance over time. Understanding the relationships between these types of dividend yield helps investors gain a more comprehensive view of a company's dividend performance and make more informed investment decisions.
SUMMARY
The classification system of dividend yield includes trailing, forward, indicated, and dividend yield on cost, each providing a unique perspective on a company's dividend payments and investment performance.