Dividend Yield - Common Share Dividend Yield

Common Share Dividend Yield

Unlike preferred stock, there is no stipulated dividend for common stock ("ordinary shares" in the UK). Instead, dividends paid to holders of common stock are set by management, usually with regard to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. The historic yield is calculated using the following formula:

For example, take a company which paid dividends totaling $1 per share last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows: \begin{array}{lcl} \mbox{Current Dividend Yield} & = & \frac{\mbox{Most Recent Full-Year Dividend}}{\mbox{Current Share Price}} \\ & = & \frac{$1}{$20} \\ & = & 0.05 \\ & = & 5% \\ \end{array}

The yield for the S&P 500 is reported this way. US newspaper and web listings of common stocks apply a somewhat different calculation: they report the latest quarterly dividend multiplied by 4 divided by the current price. Others try to estimate the next year's dividend and use it to derive a prospective dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Index. Estimates of future dividend yields are by definition uncertain.

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