What Is Dividend Yield? Explained Simply

Dividend yield tells you how much a company pays shareholders each year in cash, compared to its stock price. It's shown as a percentage.

If a stock costs $100 and pays $4 a year in dividends, its yield is 4%. Simple enough on the surface.

Here's where it gets tricky. Dividend yield has two moving parts: the dividend payment, and the stock price. If a stock price drops sharply, the yield goes up automatically, even if the company didn't raise its payout at all. A very high yield can actually be a warning sign that investors are worried about the business, not a reward for owning it.

That's why it helps to check whether a high yield is coming from a rising payment or a falling price. Also worth checking: whether the company can comfortably afford the dividend from its actual profits, or if it's stretching to keep paying it.