Yield and Dividend

A dividend is a distribution a corporation’s board declares and pays to its shareholders. A yield states an income return as a percentage of a base, and for a share that base is a price, either the price paid or the current market price. Dividend yield is the composite of the two, the annual dividend per share divided by the current market price per share, stated as a percentage.

The declaration comes before any of the arithmetic, and it is a decision of the directors rather than an accounting entry. The power to declare is discretionary, and what a board may pay a dividend out of is fixed by state corporate law, both set out in stockholder. Until the board acts there is no dividend, and so no numerator.

For tax the word is measured against earnings and profits rather than book profit (26 U.S.C. 316(a)), so part of a distribution can fall outside the definition and be reported in box 3 of Form 1099-DIV as a nondividend distribution, with Form 5452 behind it (IRS, Instructions for Form 1099-DIV). What that gap does to the book figure is in dividend ratios. A fund’s exempt-interest dividends, reported in box 12 of the same return, are a separate case, covered in tax-exempt interest income.

The Formula, and What the Numerator Sums

Dividend yield divides a year of dividends on a single share by what a single share costs today.

dividend yield  =  annual dividend per share / market price per share x 100

Annual dividend per share is the cash the corporation pays on one share across a year. Market price per share is what one share trades at on the day the yield is struck. The share count underneath the dividend per share is the outstanding count rather than every share ever issued, a difference outstanding shares separates out.

The numerator has two constructions, and the phrase does not pick between them. Sum the dividends actually paid over the last twelve months and you have one figure. Take the most recent payment instead and multiply it by the number of payments the corporation makes in a year, the simple scaling set out in annualized, and you have another. The two agree while the dividend is unchanged and part company the moment it moves, so a yield quoted without saying which numerator built it cannot be set beside another one.

The Denominator the Records Never Produce

Of every input the dividend family uses, market price is the one no accounting system produces. Nothing books it, no close generates it, and no journal entry moves it. The numerator is the opposite: it begins as a board resolution, lands in the ledger as dividends declared, and is divided by a share count the records already hold. A dividend yield is therefore one number the issuing corporation’s ledger produced over one no ledger produced, and it changes on days when nothing was recorded at all.

That split decides where each half of the answer comes from. A partner asked why a yield fell can find the dividend in the issuing corporation’s equity records and will not find the price there. It also means a rising yield is not automatically better news. The same numerator over a smaller denominator says the price fell, which is the reading dividend ratios sets out when it puts the four bases side by side.

A Worked Example

Say a corporation pays a quarterly dividend, raised it once during the year, and its share trades at the price below on the day the yield is struck.

Quarterly dividends per share, last four quarters
  first quarter                      0.30
  second quarter                     0.30
  third quarter                      0.30
  fourth quarter                     0.36
Trailing twelve month total          1.26

Market price per share today        48.00

Yield, trailing numerator
  1.26 / 48.00                      2.625%

Yield, most recent payment annualized
  0.36 x 4                           1.44
  1.44 / 48.00                      3.000%

Both percentages describe the same share, at the same price, on the same day. The only thing that differs is which dividends the numerator counted, so a quote that does not say which one it used has not yet said what its percentage means.

What Dividend Yield Is Not

Dividend yield and the dividend payout ratio share a numerator and split on the denominator: the payout ratio divides the dividend by the period’s net income and reads as the share of profit committed to shareholders, while the yield divides it by a price and reads as income per dollar of price. Its two formula forms, and why an S corporation distribution generally never reaches the numerator at all, are in dividend payout ratio.

Dividend yield is also not total return, which adds the change in the share price to the dividends and can be negative in a year the dividend was paid in full. And it is not yield on cost, which divides the current dividend by the price the holder actually paid rather than by today’s price, making it a fact about one purchase rather than about the share.

Common Questions

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm grade a real block of its own equity and reporting work before a client’s numbers depend on it.