What Is Dividend Yield? (2024)

To calculate an annual dividend yield, you simply divide the total amount of dividends paid per share within the previous 12 months by the current price per share.

Dividend yield % = (Annual dividends paid per share / Price per share) X 100

Dividend yield represents the amount of dividend income a shareholder receives relative to the share price. This is a vital factor in understanding dividend yield because it means that:

• The lower the share price, the higher the relative yield can appear. If a stock’s value is $3 per share, a 30c/share yield may not sound impressive but it would be considered a high yield at 10%. Comparatively, a 10% yield on a stock valued at $100 per share would be $10/share.
• Yield reflects return based on current share prices. If you bought in years ago at a higher price, your return isn’t quite as good. But if you bought in at a lower price, you’re getting an even better return in real terms.

You can usually find the dividend amounts paid by a company, and information about their future dividend expectations, in official annual reports or the ‘Investor’ section of their public website.

Analysis from S&P Global finds Australia is one of the world’s highest-yielding equities markets compared to other major markets, such as the UK, US, Europe, Canada and Japan. Many Australian companies aim to maintain or gradually increase their dividends over time.

The actual dividend yield on offer is influenced by:

• Payout ratio: The amount of total profits distributed as dividends by a company, a.k.a the payout ratio, matters. Australia’s payout ratio was almost double that of US and global markets in 2021.
• Stock prices: As a share price rises, yields fall—unless a company distributes a greater amount of their profits back to shareholders.
• Industry: In Australia, the ASX’s total market capitalisation is dominated by companies in the Financials and Materials sectors. These sectors also account for over 70% of total dividends paid.
• Macroeconomic trends: When a company’s profitability is boosted by changing economic conditions that affect the terms of trade or consumer spending, it naturally flows through to their profitability and capacity to pay dividends.
• Company performance: There’s a long-held view that companies that pay dividends may have a slower growth trajectory, as they divert profits away from growth-focused initiatives. Yet a sustainable dividend yield, consistently paid year after year, can support a view that a company is established and performing well.

Here’s an example of the variability of dividend yield based on share price. Telstra’s distributed profits have remained fairly consistent of late. In the second half of 2022, it paid dividends of 8.5c. In 2023, it paid one dividend of 8.5c in each half of the year. So far in 2024, it’s issued an interim dividend of 9c per share.

• In June 2023, the company’s share price was around $4.3, resulting in a dividend yield at the time of 3.9% (0.17 / 4.3 X 100).
• Currently the TLS price is $3.76, and the dividend yield is 4.65% (0.175 / 3.76 X 100).

Because the share price declined, the dividend yield is 17% higher now than it was in mid-2023 despite only a 3% (5c) difference in the amount of total dividends paid per share in the preceding 12 months.

Dividend yield can be useful if you’re pursuing a dividend strategy in your investments, especially when comparing stocks within the same sector. But it only explains dividend value in proportion to a company’s share price. As share prices fluctuate often, the yield also changes often.

Australia is one of the world’s highest-yielding equities markets compared to other major markets, such as the UK, US, Europe, Canada and Japan. Many Australian companies aim to maintain or gradually increase their dividends over time.

As an imperfect metric, yield shouldn’t be used in isolation to evaluate whether a company is worth investing in. Other factors to take into account include performance against benchmark indices, and the company’s fundamentals—its stability, financial health and growth potential.

Dividend yield doesn’t tell you whether a company is increasing its total returns (dividends plus share price gains) or increasing its dividend payment amounts over time.

Remember that a high yield could be a warning sign. You always need to be asking: ‘Can this company afford to pay this dividend over the long-term and keep growing its overall earnings and share price?’

It’s also important to note that dividend reinvestment back into the stock market—such as through automated dividend reinvestment plans—accounts for more than half of the Australian market’s total returns. In other words, using dividend payments to reinvest in stocks can improve the performance of your portfolio over time through the power of compounding.

The average dividend yield across the ASX is around 4%-4.5%, so anything above that is a healthy dividend yield. However, it’s not uncommon for top dividend payers on the ASX to have yields of 7% to 15% or higher.

Are these kinds of yields sustainable? Investors should consider the sustainability of a dividend-paying stock when dividend yields have increased due to:

• A steadily declining share price. Is there trouble afoot that will continue to erode the stock’s valuation, reputation in the market, and therefore its capacity to continue paying future dividends?
• An anomalous period of profitability. Many mining companies dominated the ‘best dividend yield’ lists in 2023 due to unusually high commodity prices and supply problems arising from global conflicts.
• A payout ratio not in line with profits. While some companies will increase dividend payments despite a decline in profits as a show of good faith and reassurance to investors, it can also be a ploy by a struggling company to lure new investors.

For income investors, another metric to examine closely alongside dividend yield is the percentage of dividends that are fully franked. Franking credits offer a tax advantage by letting you claim an offset against your income or even receive cash refunds.

Some of the most popular dividend-paying stocks listed on the ASX are blue chip companies with a strong track record of financial stability and paying a dividend. This includes the big four banks, Rio Tinto, BHP, Telstra, Transurban, Wesfarmers, Woodside Energy, CSL, Coles and Woolworths.

At the time of writing in 2024, the MarketIndex Dividend yield scan finds ASX-listed companies with the highest dividend yields include:

1. Yancoal Australia, at 20% and a share price of $5.3
2. BSP Financial Group, at 16.6% and a share price of $5.9
3. Helia Group, at 15.8% and a share price of $3.7
4. New Hope Corporation, at 15.7% and a share price of $4.4
5. Air New Zealand, at 12.7% and a share price of $0.55