Forward Dividend Yield

What it is

Forward dividend yield estimates a stock’s expected annual dividend income as a percentage of its current share price. It projects future income based on the most recent dividend information and expectations about how often dividends will be paid.

How it’s calculated

Forward dividend yield = (Expected annual dividends / Current share price) × 100

Example:
– Most recent quarterly dividend = $0.25
– Expected annual dividends = $0.25 × 4 = $1.00
– Stock price = $10.00
– Forward dividend yield = ($1.00 / $10.00) × 100 = 10%

Use the forward yield when upcoming dividends are predictable or announced.

Indicated yield (also called indicated or projected yield)

Indicated yield projects annual yield from the most recent dividend payment and the expected number of payments per year.

Indicated yield = (Most recent dividend × Number of dividend payments per year) / Stock price × 100

Example:
– Most recent quarterly dividend = $0.50
– Payments per year = 4
– Stock price = $100
– Indicated yield = ($0.50 × 4 / $100) × 100 = 2%

Indicated yield and forward yield are often used interchangeably when the most recent dividend is assumed to continue.

Forward vs. trailing dividend yield

• Forward (indicated) yield: a projection based on expected future payments and current price. Best when dividends are stable or announced.
• Trailing yield: based on actual dividends paid over the past 12 months relative to current price. Useful when future payouts are uncertain or volatile.

How dividend policy affects yields

A company’s board sets dividend policy, and common approaches include:
– Stable policy: smooth, predictable dividends that prioritize consistency.
– Constant payout policy: dividends set as a percentage of earnings, so they vary with earnings.
– Residual policy: dividends paid from leftover earnings after funding capital expenditures and working capital.

Mature firms are more likely to pay regular dividends; growth firms often reinvest earnings and may pay little or no dividend.

What is a “good” dividend yield?

• Typical range considered attractive: about 2%–6%.
• Yields above ~6% can indicate higher risk (e.g., payout sustainability concerns or a depressed share price) and require closer analysis.
• Investor goals and risk tolerance should guide whether a yield is appropriate.

Additional notes

• Use forward/indicated yield when dividend payments and schedule are predictable. Use trailing yield when payments are irregular or when you want historical context.
• Not all companies pay dividends; many growth-focused companies choose to retain earnings to fund expansion rather than distribute cash to shareholders.
• Dividend yield is only one metric—consider payout ratio, dividend growth, company fundamentals, and broader valuation (e.g., P/E) when evaluating dividend stocks.

Key takeaways

• Forward dividend yield projects expected annual dividends relative to current price; trailing yield reflects actual past payouts.
• Indicated yield = most recent dividend × expected payments per year ÷ current price.
• Dividend policy and company lifecycle strongly influence dividend behavior.
• A yield between 2% and 6% is commonly viewed as reasonable; higher yields warrant careful scrutiny.