What Is Dividend Yield?

If you invest in shares that pay dividends, one of the key metrics you’ll come across is the dividend yield. This figure shows how much income you receive as a percentage of the share price – helping you compare income returns across different investments.

This guide breaks down what dividend yield means, how to calculate it, the pros and cons of using it to assess investments, and how it compares with other measures like the dividend payout ratio.

What Is a Dividend?

A dividend is a portion of a company’s profits paid to shareholders. Dividends are usually paid in cash, either quarterly, half-yearly or annually. Some companies offer scrip dividends, where investors can choose to receive shares instead.

Not all companies pay dividends – many growth companies reinvest profits instead. Those that do pay dividends are often larger, established firms with stable earnings.

What Is Dividend Yield?

Dividend yield measures the income return of a share in relation to its current price. It tells you how much a company pays out in dividends relative to what you’d pay to buy the share.

It’s expressed as a percentage, making it easier to compare investments regardless of their price.

How Do You Calculate Dividend Yield?

To calculate dividend yield:

Dividend Yield = (Annual Dividend per Share ÷ Share Price) × 100

Example:

If a company pays £0.50 per share annually and the share price is £10:

(£0.50 ÷ £10) × 100 = 5% dividend yield

This means for every £100 you invest, you’d expect £5 per year in income (before tax), assuming the dividend remains unchanged.

What Is the Average Dividend Yield in the UK?

Dividend yields vary by sector, company size, and economic conditions. Historically, UK shares tend to have higher yields than US shares, partly due to a more income-focused investor base.

• FTSE 100 average dividend yield (2024): typically between 3% and 4.5%

• Utilities, oil, tobacco and banking stocks often have higher yields

• Tech and growth stocks usually offer lower or no yields

Remember: a high yield isn’t always good – it could signal the market expects a dividend cut.

Dividend Yield vs Dividend Payout Ratio

While dividend yield shows income vs share price, the payout ratio shows how much of a company’s earnings are paid out as dividends.

Dividend Payout Ratio = (Dividend per Share ÷ Earnings per Share) × 100

• A high payout ratio may suggest the dividend is unsustainable

• A low payout ratio may suggest room for dividend growth

• Comparing both gives a fuller picture of income risk and potential

What Are the Advantages of Dividend Yield?

• Helps compare income-producing investments

• Allows you to estimate annual income return

• Useful for building an income-focused portfolio

• Simple to calculate and easy to track over time

What Are the Disadvantages of Dividend Yield?

• Doesn’t show dividend sustainability

• Yield may be high due to a falling share price (a red flag)

• Doesn’t account for dividend cuts or suspensions

• Ignores capital growth potential of the share

High dividend yields can sometimes be a sign of trouble, not opportunity.

Dividend Yields and Inflation

If inflation is high, the real value of dividend income declines unless companies increase their dividend payments to keep pace. Investors seeking income must assess whether a company’s earnings and dividends can grow over time to protect against inflation.

What Other Factors Affect Dividend Yield?

• Market conditions – falling share prices push yields higher

• Company performance – declining profits may lead to dividend cuts

• Sector trends – defensive sectors tend to maintain dividends

• Currency fluctuations – important if the dividend is paid in foreign currency

• Tax – UK investors pay tax on dividends over the annual allowance

What Dividend Yield Strategies Are There?

1. High-Yield Investing – Focus on shares with yields over 5–6%. Good for income, but carries risk of cuts.

2. Dividend Growth Investing – Favour companies with rising dividends, even if starting yield is modest.

3. Blended Approach – Mix high yield and growth shares for income now and in future.

4. Reinvestment (DRIP) – Reinvest dividends to compound returns over time.

Final Thoughts

Dividend yield is a valuable tool for assessing how much income an investment could generate, but it’s not the only thing that matters. Always consider whether the dividend is sustainable, how the business is performing, and what role dividend income plays in your wider financial goals.

Used alongside other metrics like payout ratio and earnings growth, dividend yield helps you make more informed investment decisions—whether you're looking for income, growth, or a bit of both.