How to Calculate Dividend Yield

Values between roughly 2.5% and 8% are often considered attractive without already being a warning sign.

A very low yield (below 1%) is usually uninteresting for pure income strategies, but can be normal for growth companies.

An unusually high yield (above 8%) is often a so-called dividend trap: the price has fallen sharply, which mathematically inflates the yield. That's frequently a sign of fundamental problems rather than attractiveness.

It also matters whether the dividend is covered by genuine free cash flow rather than financed through debt or eroding the balance sheet.

The sector decides what is normal. Utilities, telecoms, real estate companies and tobacco makers earn steadily and invest little in growth, so they pay out a lot. Software and technology companies tend to reinvest their profit or buy back shares, and their dividend yield is often below 1%. A 3% yield can be high in one sector and below average in another. The sector ranges further down show where a stock's value sits by comparison.

The calculation uses the dividends of the last twelve months divided by the current price. Because the price changes every day, the yield changes every day too, even though the payout stays the same. Some sites use the dividend expected for the current year instead. When two sources disagree, check which basis each one uses.

Yield on cost is something else. If you bought a share ten years ago at €20 and receive €1.60 in dividends today, you earn 8% on your original outlay. For judging the stock today, only today's price counts.