Dividend Yield

A stock pays a 2 dollar annual dividend and trades at 50. Its dividend yield is:

1. A.4%Correct - 2 / 50 = 4%.
2. B.25%25% comes from dividing the 50-dollar price by the 2-dollar dividend, which is the ratio inverted. Yield asks what the payment represents relative to the price, so the dividend belongs on top.
3. C.5%5% is close but does not follow from these figures; it would take a 2.50 dividend at this price, or a price of 40 with this dividend. Dividing 2 by 50 gives exactly 4%.
4. D.2%This carries the 2-dollar dividend across and reads it as a percentage. The dollar amount only becomes a yield after it is measured against the 50-dollar price.

Why: Dividend yield = annual dividend / price = 2 / 50 = 4%.

A stock paying a 2.40 dollar dividend at a 60 dollar price has a dividend yield of:

1. A.4%Correct - 2.40 / 60.
2. B.6%This overstates the yield by half. Check it against the arithmetic: 6% of a $60 price would require a $3.60 dividend, but the stock pays $2.40.
3. C.25%This inverts the fraction, computing 60/2.40 = 25 and labeling it a percent. Yield always puts the annual dividend over the price, and a stock returning a quarter of its price in cash each year would be extraordinary.
4. D.2.5%This is the yield a $60 stock would pay on a $1.50 dividend, so it understates the actual $2.40 payout. Divide the full annual dividend by the price to get 4%.

Why: 2.40 / 60 = 4%.

A stock paying a 3-dollar annual dividend at a 75-dollar price has a dividend yield of:

1. A.25%This flips the fraction, computing 75/3 = 25 and calling it a percent. Yield answers how much cash the investor collects per dollar invested, so the dividend goes on top.
2. B.4%Correct - 3 / 75.
3. C.2.5%This is the yield a $75 stock would carry on a $1.875 dividend, well under the $3 actually paid. Dividing 3 by 75 gives 4%.
4. D.7.5%This roughly doubles the true yield, the result of dividing by 40 rather than 75. Sanity-check it: a 7.5% yield on a $75 stock would require a dividend of about $5.63.

Why: Dividend yield = 3 / 75 = 4%.

A stock's dividend yield equals:

1. A.Dividend divided by earningsDividend divided by earnings is the payout ratio, which measures how much of profit is distributed. Yield asks a different question: what the investor receives relative to the price paid.
2. B.Annual dividend divided by share priceCorrect - income return on price.
3. C.Price divided by dividendThis inverts the ratio and produces a multiple rather than a percentage. Yields are always income over price, which is what makes them comparable across investments.
4. D.Earnings divided by priceEarnings divided by price is the earnings yield, the reciprocal of the P/E. It measures total profit attributable to the share, whereas dividend yield counts only the cash actually paid out.

Why: Dividend yield = annual dividend per share divided by the share price.