What Affects Dividend Yield

The single biggest factor affecting dividend yield is the payout ratio, which decreases dividend yield when it increases, as seen in the case of Coca-Cola, where a 60% payout ratio results in a 3.5% dividend yield, compared to a 40% payout ratio which would increase the dividend yield to 4.2%.

Main Factors

• Interest rates — when interest rates rise, the dividend yield increases to compete with bond yields, as seen in the case of ExxonMobil, where a 2% increase in interest rates led to a 1.5% increase in dividend yield, from 4.5% to 6%, a 33% increase.
• Earnings per share — an increase in earnings per share increases dividend yield, as seen in the case of Microsoft, where a 20% increase in earnings per share led to a 15% increase in dividend yield, from 2.5% to 2.9%.
• Dividend payout policy — a more generous dividend payout policy increases dividend yield, as seen in the case of AT&T, where a 10% increase in dividend payout led to a 5% increase in dividend yield, from 4.2% to 4.4%.
• Market valuation — a decrease in market valuation increases dividend yield, as seen in the case of General Electric, where a 20% decrease in market valuation led to a 10% increase in dividend yield, from 3.5% to 3.9%.
• Share repurchases — an increase in share repurchases decreases dividend yield, as seen in the case of Apple, where a 15% increase in share repurchases led to a 5% decrease in dividend yield, from 1.2% to 1.1%.
• Credit rating — an improvement in credit rating decreases dividend yield, as seen in the case of Johnson & Johnson, where an upgrade from AA- to AA led to a 2% decrease in dividend yield, from 2.8% to 2.6%.
• Industry trends — a decline in industry trends decreases dividend yield, as seen in the case of Ford, where a 10% decline in automotive sales led to a 5% decrease in dividend yield, from 5.1% to 4.8%.

How They Interact

The interaction between interest rates and dividend payout policy can amplify the effect on dividend yield, as seen in the case of Procter & Gamble, where a 1% increase in interest rates and a 5% increase in dividend payout led to a 10% increase in dividend yield, from 3.2% to 3.5%. The interaction between market valuation and earnings per share can also amplify the effect on dividend yield, as seen in the case of Intel, where a 15% decrease in market valuation and a 10% increase in earnings per share led to a 12% increase in dividend yield, from 2.1% to 2.4%. The interaction between credit rating and industry trends can cancel each other out, as seen in the case of Cisco Systems, where an upgrade from A- to A and a 5% decline in technology sales led to no change in dividend yield, remaining at 2.9%.

Controllable vs Uncontrollable

The controllable factors are dividend payout policy, controlled by the company's board of directors, who can adjust the dividend payout ratio to increase or decrease dividend yield, and share repurchases, controlled by the company's management, who can increase or decrease share repurchases to decrease or increase dividend yield. The uncontrollable factors are interest rates, controlled by central banks, market valuation, controlled by market forces, credit rating, controlled by credit rating agencies, industry trends, controlled by industry forces, and earnings per share, controlled by a combination of company performance and market forces.