Yield moves with price
A falling price raises yield.
All tracks and lessons
Dividends and dividend yield
Some companies pay out part of their profit. Yield shows the payout relative to the price — and a very high yield can be a warning.
In this lesson you will
- Calculate dividend yield
- Explain why a very high yield can be risky
- Understand payout ratio and reinvesting
A dividend is a payment a company makes to shareholders, usually from profits. Not all companies pay them; many growing companies reinvest profits instead.
Dividend yield
Yield = annual dividend per share ÷ share price. A $2 yearly dividend on a $50 share is a 4% yield.
Why a high yield can be a warning
Yield rises when the price falls. A very high yield can mean investors expect the dividend to be cut. Dividends are decided by the company and are never guaranteed.
Payout ratio
The payout ratio is dividends ÷ earnings. A company paying out more than it earns cannot do so forever.
Reinvesting
- Many accounts let dividends buy more shares automatically.
- Reinvesting lets dividends compound over time.
- Outside tax-advantaged accounts, dividends are generally taxable in the year received.
Education only — GetGuac does not recommend individual stocks.
By the GetGuac team · Editorial policy
Three ideas to keep
Dividends are a choice
Companies can cut them.
Reinvesting compounds
Dividends buying more shares.
Do it in 4 steps
Learn the yield formula
Dividend ÷ price.
Check the payout ratio
Dividends ÷ earnings.
Decide on reinvesting
In your account settings.
Know the tax treatment
For taxable accounts.
Same dividend, falling price
Made-up company paying $2.00 a year.
| Share price | Annual dividend | Yield |
|---|---|---|
| $50 | $2.00 | 4% |
| $40 | $2.00 | 5% |
| $25 | $2.00 | 8% |
The yield doubled because the price halved — which may signal trouble, not a bargain.
Where this usually goes wrong
- Chasing the highest yield
- Assuming dividends are guaranteed
- Ignoring the payout ratio
Calculate the yield of a made-up $1.20 dividend on a $30 share.
Tools and guides for this lesson
Quick quiz
1. Dividend yield equals…
2. A sudden very high yield may mean…
3. Are dividends guaranteed?
0 of 3 answered
Puzzle
A company earns $4 per share and pays $3 in dividends. What is the payout ratio?
Show the answer
75%
$3 ÷ $4 = 0.75.