Alternate name: Leading dividend yield, forward yield
For example, the forward dividend yield for Company Y is 2.20%. Assuming the stock price ($81.84) and payout remain the same, investors can expect to make $1.80 (2.20% of the stock price) per share in dividends over the next year.
How Do You Calculate Forward Dividend Yield?
To calculate the forward dividend yield, you would annualize the most recent dividend payment and then divide it by the stock price. Next, multiply the number by 100 to produce a percentage figure. Take note of the formula below as you read through the upcoming example. Let’s say that Company X’s last quarterly dividend was $2 per share. The current stock price is $100. To annualize the dividend, you would multiply $2 by four since the company pays dividends quarterly, or four times per year. Assuming that Company X’s quarterly payment does not change, it would issue total dividends of $8 per share over the year.
Most recent dividend, annualized: $8Stock price: $100
Now, let’s plug these numbers into the formula: ($8/$100)*100=8% The forward dividend yield for Company X is 8%.
How Does Forward Dividend Yield Work?
Forward dividend yields are best used for companies where dividend payments can be accurately predicted. Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, MI, told The Balance in an email that forward dividend yield should be used after researching the company’s dividend policy and stability. “Does the company have a history of stable dividends which would provide comfort in projecting the current dividend forward?” Milan said. “And, does the company have a dividend policy where they declare the dividend on an annual basis and, even more so, preferably at the beginning of the calendar year? If that is the case, the investor can be fairly confident the declared dividend will be consistent [and] stable for the year going forward.” Milan listed dividend aristocrats as examples of companies with reliable forward dividend yields. Dividend aristocrats, like Coca-Cola, have issued and steadily raised their dividends over at least 25 years.
Limitations of Forward Dividend Yield
But forward dividend yield has its limitations and should not be used as the sole basis for an investment decision. In these cases, a trailing dividend yield provides a more reliable projection. This type of yield accounts for all actual dividends per share paid over the last twelve months—not just the most recent. Applying trailing dividend yield to our earlier example, let’s say Company X issued the following dividends last year:
March: $0.50 per shareJune: $1.00 per shareSeptember: $0.50 per shareDecember: $2.00 per share
Company X paid a total of $4 per share in the past year. Now, let’s plug those numbers into the formula: ($4/$100)*100=4% The trailing dividend yield is 4%. Our earlier example of forward dividend yield considered only the most recent dividend payment ($2 per share). In this case, using a trailing dividend yield to account for all of last year’s dividends offers a more accurate forecast.
Difference Between Forward Dividend Yield and Trailing Dividend Yield
Similar to a regular dividend yield, the forward dividend yield does not always determine a worthy investment. A higher yield may indicate a drop in the stock’s price due to financial setbacks—bankruptcy, possibly. Keep in mind that a higher yield also means a higher portion of the company’s revenue is not reinvested back into the company’s growth.
