What Is a Forward Dividend Yield?
A forward dividend yield is an estimation of a year’s dividend expressed as a percentage of the current stock price. It is used to project the expected future income from an investment.
The forward dividend yield is calculated by dividing a year’s worth of future dividend payments by a stock’s current share price. This is in contrast with the trailing dividend yield, which is calculated based on the actual dividend payments over the past year.
Key Takeaways
- Forward dividend yield estimates a company’s future dividends relative to its current stock price, offering a projection of potential investment income based on the most recent dividend and expected consistency.
- Trailing dividend yield reflects the actual dividend payout over the previous year, providing investors with historical data when future payouts are uncertain, contrasting with forward yield’s predictive nature.
- Indicated yield calculates projected dividends using the most recent dividend data, similar to forward yield but adjusts for the number of dividends expected yearly and the current stock price.
- Corporate dividend policies, determined by the board of directors, affect how and when dividends are issued, with mature companies often paying stable dividends, while growing companies reinvest profits.
A good dividend yield generally falls between 2% and 6%, with yields above 6% regarded as higher risk, subject to investor risk tolerance. The S&P 500’s historical average is 4.29%, though its current yield is lower.
How to Calculate and Use Forward Dividend Yield
For example, if a company pays a Q1 dividend of 25 cents, and you assume the company’s dividend will be consistent, the firm will be expected to pay $1.00 in dividends over the course of the year. (25 cents x 4 quarters). If the stock price is $10, the forward dividend yield is 10% ([1/10] x 100).
The opposite of a forward dividend yield is a trailing dividend yield, which shows a company’s actual dividend payments relative to its share price over the previous 12 months. When future dividend payments are not predictable, the trailing dividend yield can be one way to measure value. When future dividend payments are predictable or have been announced, the forward dividend yield is a more accurate tool.
An additional form of dividend yield is the indicated yield or the dividend yield that one share of stock would return, based on its current indicated dividend. To calculate indicated yield, multiply the most recent dividend issued by the number of annual dividend payments (the indicated dividend). Divide the product by the most current share price.
Indicated Yield=Stock Price(MRD)×(# of DPEY)where:MRD=Most recent dividendDPEY=Dividend payments each year
For example, if a stock trading at $100 has a most recent quarterly dividend of $0.50, the indicated yield would be:
Indicated Yield of Stock ABC=$100$0.50×4=2%.
The Impact of Dividend Policy on Forward Dividend Yields
A company’s board of directors decides its dividend policy. Generally, established companies issue dividends, while younger firms reinvest profits into research, development, and expansion. Common dividend policies include a stable policy, where companies issue dividends regardless of earnings changes.
A stable dividend policy aims to align with long-term growth instead of quarterly earnings fluctuations. With a constant dividend policy, a company issues a dividend each year, based on a percentage of the company’s earnings.
With constant dividends, investors experience the full volatility of company earnings. Finally, with a residual dividend policy, a company pays out any earnings after it pays for its own capital expenditures and working capital needs.
What Is a Good Dividend Yield?
Generally, a dividend yield between 2% and 6% is considered a good dividend yield. Yields above 6% are considered to be higher-risk stocks, which, depending on the investor’s risk tolerance, may be a risky investment not worth exploring. As of March 10, 2022, the average dividend yield for the S&P 500 since inception is 4.29% and its current dividend yield is 1.42%.
What Is a Good P/E Ratio?
The higher the P/E ratio means the more willing investors are to pay a higher share price now for a stock with the expectation of growth in the future. The average P/E ratio of the S&P 500 since inception is 15.97 while its current P/E ratio is 24.29.
Does Tesla Pay Dividends?
No, Tesla has not and does not intend on paying dividends. The company believes in keeping its retained earnings to fund the growth of the company.