Reader Question: How Do I Know Which Dividend Yield Is Correct?
I love hearing from my High-Yield Investing subscribers. Any time I get an email, whether in the form of a question, some constructive feedback, or simply a success story — it reminds me that we’ve garnered quite a loyal following over the years.
One of the most common questions I get is about — you guessed it, dividend yields.
The question usually goes something like this…
The dividend yields listed in High-Yield Investing sometimes differ from those I’ve found on various financial websites. Which one is correct?
This might sound like a simple question, but it’s worth addressing for a wider audience.
Dividend yields can be calculated in a number of different ways. This is why various websites may show different yields for the exact same security. Let’s dig in…
Trailing Yield Vs. Forward Yield
When payments vary greatly, the most reasonable calculation involves taking the last 12 months of dividend payouts (trailing twelve months or TTM) and dividing that figure by the firm’s current share price.
This is called a trailing yield.
For example, let’s say Company XYZ’s current share price is $50. Let’s also assume the firm has made the following dividend payments over the past year:
March — $0.50 per share
June — $0.50 per share
September — $0.50 per share
December — $1.00 per share
As you can see, Company XYZ has paid $2.50 per share in total dividends over the past twelve months. So in this example, XYZ sports a trailing dividend yield of 5% (calculated by taking the $2.50 in actual trailing dividend payments and dividing that figure by a $50 share price).
But it’s important to remember that this represents just one way of calculating yields. Some financial websites and other media sources may report dividend yields differently. For example, instead of showing trailing, they may use forward yields.
Unlike a trailing yield, a forward yield projects dividend payments over the next 12 months. It’s best used when these payments can be predicted with reasonable accuracy. This takes the stock’s latest declared dividend payment and annualizes it over the next 12 months.
Returning to our example, Company XYZ’s most recent dividend payment was $1.00 per share. Assuming the firm’s quarterly dividend payout remains at this new level, the firm will deliver total dividend payments of $4.00 per share in the coming year. Therefore, Company XYZ’s forward yield is 8%. (We calculate this by taking the $4.00 in projected future dividend payments and dividing that figure by a $50 share price.)
This forward yield of 8% differs greatly from the trailing yield of 5% shown above. Both are correct. They’re simply calculated differently.
Things To Keep In Mind
Over at High-Yield Investing, we generally prefer trailing yields when possible, as they represent concrete dividend payments that a firm has already made. However, when a company has announced a regular dividend payout for the forthcoming 12-month period, we may use a forward yield to more accurately reflect what shareholders can expect to receive.
To make matters even more complex, what counts as a dividend payment may also vary. Depending on the type of security, it may pay ordinary dividends, short-term capital gains, long-term capital gains, return of capital, or one-time special payments. Some websites include all components of the payment, while others don’t.
The why isn’t important. They have their reasons. But it’s important to know.
My research staff and I don’t rely exclusively on any one source. But one that we like for basic information on share prices and dividend payments is Yahoo Finance. Morningstar is another great source (especially for funds). That said, it’s best to go directly to the source whenever possible. Most companies list their historical distributions on their website, and declared distributions can usually be found in their press releases. We generally use this data to calculate the yields we present in our various newsletters.
Bottom line, it’s important to understand the difference between trailing yield vs. forward yield. It explains many of the discrepancies you’ll find from different information sources. And it can make a huge difference in what you’ll actually earn from your investment.
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