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Watch: Dividend Yield Problem Solved in Excel and by Hand

Run time: 8:24Covers: the dividend yield formula, a worked problem, and the Excel setupTaught by: Dr. Paul Borosky, DBA, MBA

The Short Answer

What Is the Dividend Yield Formula?

Answer

Dividend yield equals the annual dividend divided by the current stock price. Current yield uses the dividend paid over the past year (D0). Expected yield uses the dividend forecast for next year (D1), which is D0 grown by the expected growth rate.

The Formulas

Current = D0 ÷ P0   |   Expected = D1 ÷ P0

D0
Annual dividend just paid (add up all quarterly payments)
D1
Next year's expected dividend: D0 × (1 + g)
P0
Current stock price
g
Expected dividend growth rate, as a decimal

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Step by Step

How Do You Calculate Current and Expected Dividend Yield?

Say a stock trades at $50.00. It paid $2.00 in dividends over the past year, and dividends are expected to grow 5% a year.

  1. 1

    Write down what you know

    D0 = $2.00. P0 = $50.00. g = 5%, or 0.05.

  2. 2

    Find the current yield

    $2.00 ÷ $50.00 = 0.04, or 4.00%.

  3. 3

    Grow the dividend one year

    D1 = $2.00 × 1.05 = $2.10.

  4. 4

    Find the expected yield

    $2.10 ÷ $50.00 = 0.042, or 4.20%.

  5. 5

    Add growth for total expected return

    Under the constant growth model, expected return = D1 ÷ P0 + g = 4.20% + 5.00% = 9.20%. Yield is only the cash part of the return.

Dr. Paul's Insight

A yield can rise for a bad reason. If this $50 stock falls to $40 and the $2.00 dividend stays put, the yield jumps to 5.00%. Nothing got better. The price dropped. Before you chase a high yield, ask why the price is low and whether the dividend is safe.

In Excel

How Do You Calculate Dividend Yield in Excel?

Put the dividend in B1, the price in B2, and the growth rate in B3. Then divide.

ProblemExcel formulaAnswer
Current yield: $2.00 dividend, $50.00 price=2/504.00%
Expected yield: same stock, 5% growth=2*(1+5%)/504.20%
Quarterly $0.48 dividend, $64.00 price=(0.48*4)/643.00%
Same $2.00 dividend after price falls to $40.00=2/405.00%

With cell references the formulas become =B1/B2 for current yield and =B1*(1+B3)/B2 for expected yield. Format the result as a percentage with two decimals.

Avoid These

What Are the Most Common Dividend Yield Mistakes?

  • Using one quarterly payment. A $0.48 quarterly dividend is $1.92 a year. Annualize before you divide.
  • Mixing up D0 and D1. Current yield uses the dividend already paid. Expected yield uses next year's. Read the question carefully.
  • Treating yield as total return. Yield ignores price growth. Total expected return adds the growth rate.
  • Chasing the highest yield. A falling price raises the yield. Check why before buying.
  • Comparing to preferred stock without adjusting. A preferred dividend is fixed. A common dividend can grow or be cut. The yields carry different risk.

Real World Use

How a Student Uses Dividend Yield

Investments Class

Two stocks, two yields, one right comparison

The question: "Stock A pays $1.80 a year and trades at $48.00, with 3% expected growth. Stock B pays $3.10 and trades at $95.00, with 7% expected growth. Which has the higher yield, and which has the higher expected return?"

Current yields: A = $1.80 ÷ $48.00 = 3.75%. B = $3.10 ÷ $95.00 = 3.26%. A wins on yield. Expected yields: A = $1.854 ÷ $48.00 = 3.86%. B = $3.317 ÷ $95.00 = 3.49%.

Now add growth. A: 3.86% + 3% = 6.86%. B: 3.49% + 7% = 10.49%. B wins on total expected return. That is the full answer: the higher yield is not always the better investment.

Keep Going

More Videos in This Series

Constant Growth Formula for Stocks

Dr. Paul values a stock whose dividend grows every year. (7:56)

Preferred Stock Price and Required Rate of Return

Dr. Paul prices a fixed dividend and solves for its required return. (12:41)

Holding Period Return Calculations

Dr. Paul combines dividends and price change into one total return. (3:51)

Questions

Dividend Yield Questions Students Ask

What is the dividend yield formula?
Dividend yield = annual dividend ÷ current stock price. A stock that pays $2.00 a year and trades at $50.00 has a dividend yield of 4.00%.
What is the difference between current and expected dividend yield?
Current yield uses the dividend paid over the past year, D0. Expected yield uses next year's forecast dividend, D1, which equals D0 × (1 + g). With a $2.00 dividend, 5% growth, and a $50.00 price, current yield is 4.00% and expected yield is 4.20%.
How do you calculate dividend yield with quarterly dividends?
Multiply the quarterly dividend by four to get the annual amount, then divide by the price. A $0.48 quarterly dividend on a $64.00 stock is $1.92 a year, for a 3.00% yield.
Is a higher dividend yield always better?
No. A yield rises when the price falls, even if nothing about the dividend improved. A high yield can also signal that investors expect a dividend cut. Compare total expected return, not yield alone.
How do you calculate dividend yield in Excel?
Put the annual dividend in B1 and the price in B2, then type =B1/B2. For expected yield, add the growth rate in B3 and use =B1*(1+B3)/B2. Format the cell as a percentage.
Beginner's Guide to Understanding Financial Statements and Financial Ratios book cover

Dividends make more sense when you can find them on the statements.

Dr. Paul's Beginner's Guide to Understanding Financial Statements and Financial Ratios shows where dividends paid show up on Apple's actual 10-K and how they connect to equity and cash flow, in the same plain English he uses in class.

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Written by Dr. Paul Borosky, DBA, MBA, current college professor, business consultant, and author with 14+ years and 1,000+ businesses served.

This page is for general educational purposes only. It is not financial, investment, legal, or tax advice.