Investing term
What is Dividend yield?
Annual dividend per share ÷ share price. The cash income the stock pays out as a percentage of price.
Dividend yield is a stock's annual dividend per share divided by its price — the cash income it pays out as a percentage. A stock trading at $40 that pays $1.60 a year in dividends has a 4% yield: for every $100 invested, you receive $4 of income before the share price moves at all.
It lets you compare the income from different stocks on the same basis, and it's the headline number income investors watch. But it comes with a crucial catch: because yield rises as price falls, an unusually high yield often reflects a crashed price rather than a generous payout — and can be a warning that the market expects a dividend cut. A sky-high yield is a question to investigate, not a gift to grab. Yield is also only half the picture; a growing dividend from a healthy company can be worth far more than a high but stagnant or shaky one.
Dividend yield is annual dividend ÷ price — the cash income a stock pays. But because yield rises as price falls, an unusually high yield can be a warning of a coming cut, not a gift.
For example
A $40 stock paying $1.60 a year yields 4%. If the price crashes to $20 on bad news, the same $1.60 dividend now shows an 8% yield — which looks generous but may be about to be cut.
Learn it by doing
That's Dividend yield in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
Dividend yield matters because it's the standard measure of a stock's income, but its inverse relationship with price makes it easy to misread. A high yield can mean a bargain income stream — or a falling price flagging trouble ahead. Understanding that yield rises as price falls reframes an unusually high yield as a potential red flag rather than an opportunity, and pushes you to check whether the dividend is actually sustainable rather than just large.
⚠ Buying the highest yield on the screen
Sorting stocks by dividend yield and buying the top of the list often lands you in trouble, because the highest yields frequently belong to companies whose prices have crashed for good reason. That elevated yield can be the market pricing in a coming cut. Judge a dividend by whether the business can sustain it — check coverage and the payout ratio — not by the size of the yield alone.