Dividend yield
Annual dividend as a percentage of share price.
Dividend yield is the ratio between annual dividend per share and current share price, expressed as a percentage. It's the most direct measure of how much cash, relative to the price you paid, a company returns to shareholders over a year.
A dividend yield of 3% means that if you buy the share today at $100 and the company pays $3 in dividends per year, you'll receive $3 in cash for each share you hold over the next twelve months. It's a particularly watched metric by income-oriented investors and pension portfolio managers.
Worked example
Coca-Cola (KO) trades near $70 on May 17, 2026, paying an annual dividend of $1.94 per share (four quarterly dividends of $0.485). Dividend yield = (1.94 ÷ 70) × 100 = 2.77%.
For context, Italy's Enel trades around €7.50 with a €0.46 annual dividend — a 6.1% yield. Italian large caps historically offer higher yields than US ones: stronger dividend culture, less buyback orientation. Yields of 5–7% are common in the FTSE MIB; in the US, a 5% yield is considered 'high' and deserves attention to why.
When it's used
Dividend yield is central to two strategies: income investing (steady cash flow from dividends, independent of price moves) and dividend growth investing (selecting companies that not only pay dividends but increase them — 'dividend aristocrats' have raised them for 25+ consecutive years). It's also key when comparing a stock to a bond: if a bond yields 4% and a 'stable' stock yields 3%, the stock must justify the gap with growth prospects.
Limits
Very high dividend yield can be a warning sign, not an opportunity. If a stock's price has collapsed because the business is in trouble, the yield calculated on the historic dividend mechanically explodes — but that dividend may not be sustainable and could be cut at the next board meeting. This is called a 'dividend trap'. The filters are payout ratio (what % of earnings is distributed), dividend history (continuity, past cuts), and free cash flow coverage.
Frequently asked
Is higher yield always better?
No. Yields above 8–10% are often signs of financial stress or unsustainable payout ratios. Cross-check with payout ratio, free cash flow, and dividend history.
Does dividend yield include taxes?
No, it's gross. In Italy dividends are subject to a 26% withholding tax. Retail net yield is therefore yield × 0.74.
Do all companies pay dividends?
No. Many growth companies (Amazon, Alphabet until 2024, Tesla) prefer reinvesting earnings rather than distributing them. It's a strategic choice: growth-oriented investors often prefer the reinvestment, income-oriented investors prefer dividends.
Related terms
Educational definition. Not financial advice.