How is the dividend yield calculated?

The dividend yield is a key financial metric used by investors to assess the return on investment from owning shares of a stock, specifically in terms of cash dividends received. It is calculated by taking the expected cash dividend per share and dividing it by the current market price per share of the stock. This formula expresses the dividend yield as a percentage, providing a clear picture of the income generated relative to the price paid for the stock.

By using the expected cash dividend in the numerator, this approach focuses on the real cash flow an investor anticipates receiving from the investment. Dividing by the stock's current price allows investors to see how much yield they can expect compared to what they pay for the security. Higher dividend yields can indicate a potentially income-generating investment, making it a valuable metric for those looking for passive income.

Other methods for calculating dividend-related figures, while useful in different contexts, do not give the direct dividend yield related to the stock's price. Understanding this relationship can help investors make more informed decisions based on their income objectives.