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How to calculate the dividend yield

Consider a fictitious company, Loadsamoney Ltd, whose shares cost 100p each, which is paying an annual gross dividend [1] of 10p per year.

The dividend yield is calculated by dividing the dividend by the share price, and then expressing it as a percentage.

In Loadsamoney’s case then, the dividend yield is:

10p/100p x 100 = 10%

Imagine Loadsamoney Ltd announces an exciting new product, which analysts believe will sell spectacularly well and thus results in a huge demand for Loadsamoney’s shares and a doubling of its share price to 200p.

The 10p dividend is the same, so the yield is now:

10p/200p x 100 = 5%

A few months later the product proves a flop, and Loadsamoney Ltd’s share price falls to 125p. However in the interim Loadsamoney has revealed its annual results and increased its dividend payment by 10% for the year, to 11p.

Again, the Dividend Yield = Dividend/Share Price x 100:

11p/125p x100 = 8.8%

The most important point to note is that the dividend yield varies with the share price. All things being equal, a rising share price will reduce the dividend yield, while a falling share price will increase the dividend yield.