Dividend yield
Annual dividends per share divided by the share price. In derivatives pricing it is often treated as a continuous yield, δ, which lowers the forward price and the value of a call on the share.
Where you will meet it
Dividend yield appears in 14 learning outcomes on the CFA syllabus. A few of them:
- Work out an equity's price return and its total return
“Total return adds income received, usually dividends: (P1 - P0 + D) / P0, so it equals price return plus dividend yield on the starting price.”
- Work out the cost of both common and preferred equity
“The dividend discount approach rearranges the Gordon growth model to give the expected dividend yield plus the growth rate.”
- Back out a required return from any DDM, including the H-model and the Gordon growth model
“With the constant-growth model the answer is direct: r = D1 ÷ P0 + g, next year's dividend yield plus growth.”
- Recognise the traits of firms whose cash dividend may prove unsustainable
“Warning signs that a dividend may be cut include coverage by net income close to or below 1, FCFE that does not cover the dividend, rising leverage suggesting the payout is being borrowed, declining or volatile earnings, and a dividend yield far above peers, which often means the market already doubts the payment.”
See also
Practise it
Practise dividend yield until it is automatic: questions that explain every wrong option.
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