The Basic Formula
Dividend yield = Annual dividend per share / Current stock price × 100%
Example: Stock pays $4/year dividend, trades at $100 → yield = 4%
What Yields Mean
Low yield (0-2%)
Growth stocks, early-stage companies, tech. Reinvesting profits for growth rather than returning to shareholders.
Moderate yield (2-4%)
Mature blue chips, healthy large caps. Sweet spot for many dividend investors.
High yield (4-6%)
Income-focused investments, mature utilities, some REITs, preferreds.
Very high yield (6-10%+)
Caution zone. Often signals market distress, dividend sustainability concerns, or structural decline.
Extreme yield (>10%)
Almost always a yield trap. Either dividend will be cut or the stock is in fundamental trouble.
The Yield Trap
A stock's dividend yield rises when:
- Dividend stays constant and price falls
- Dividend actually grows (less common for high-yield setups)
If price is falling because of genuine business concerns, the high yield is not sustainable. Cut + price decline = double loss.
Famous yield traps:
- AT&T (2018-2022): High-yield favorite; cut dividend by 50% in 2022
- General Electric (2017-2018): Classic industrial cut twice
- Some bank preferreds (2023): Regional bank stress compressed valuations dramatically
Dividend Sustainability Checks
Payout ratio
Annual dividend / Annual earnings. Ratio above 80-100% means little room for earnings declines before dividend must be cut.
Free cash flow coverage
Free cash flow / Dividend. Healthy companies cover dividends 1.5-3x from FCF.
Debt levels
Heavy debt + dividend = pressure. Management may cut dividend to conserve cash during stress.
Historical growth
Companies that have grown dividends for 10+ consecutive years (Dividend Achievers, Aristocrats) have strong records.
Yield on Cost
Yield on cost = Current dividend / Your original purchase price
If you bought a stock at $50 when the dividend was $2, and today the dividend is $4 on a $150 stock:
- Current yield for new buyers: 4/150 = 2.7%
- Your yield on cost: 4/50 = 8%
This is why long-term dividend-growth holders accept lower current yields.
REITs and MLPs
Real Estate Investment Trusts (REITs) must pay out 90%+ of taxable income as dividends. Typical REIT yields 3-6%. MLPs similar.
Important: REIT / MLP dividends are often not "qualified" and taxed at ordinary income rates.
Ex-Dividend and Record Dates
- Declaration date: board announces dividend
- Ex-dividend date: you must own the stock BEFORE this date to receive dividend
- Record date: registry snapshot
- Payment date: you receive the cash
Share price typically drops by ~dividend amount on ex-date.
Dividend Aristocrats vs High-Yield
Dividend Aristocrats
S&P 500 members with 25+ consecutive years of dividend increases. Typical yields 2-3%. Slow but reliable growth.
High-Yield ETFs
Funds like VYM, SCHD, HDV target higher current yields with more moderate growth.
Both have valid roles; pick based on your income needs vs growth preferences.
Key Takeaways
- Yield = annual dividend / price
- Very high yields (>10%) are usually traps
- Check payout ratio and FCF coverage for sustainability
- Yield-on-cost grows for dividend-growth holders over time
- REITs / MLPs have different tax treatment
Browse [/topic/earnings-season](/topic/earnings-season) for dividend news context.