Some companies make dividend payments as a way of sharing some of their profits with stockholders. Dividend investing can potentially help provide steady investment income—even during periods when the market is down. Dividend yield can come in handy when comparing dividend stocks and deciding which ones to invest in. Here’s a closer look at what it is, how it works, and how to calculate it.
What is dividend yield?
Dividend yield is the percentage return rate that a company pays in dividends, based on its current dividend rate and stock price. It gives investors an idea of how much annual income they might expect from dividend payments, assuming the dividend doesn’t change.
As a quick example, if a company pays $1 in annual dividends per share, and its share price is currently $25, its dividend yield would be 4%. (Keep reading for more on the calculation.)
How does dividend yield work?
Keep in mind that the dividend yield is a ratio. If either the share price or the dividend payment changes, the yield will also change.
What increases the dividend yield?
The dividend yield can increase if:
- The dividend rises
- The share price falls
What causes the dividend yield to drop?
The dividend yield can fall if:
- The dividend falls
- The share price rises
However, these effects can also cancel each other out or magnify each other. For example, if the dividend payment and the stock price both rise, the dividend yield could end up staying the same.
What is the dividend yield formula?
Dividend yield is a simple formula:
Dividend yield = (annual dividends per share) / (current share price)
That will give you a decimal figure, which you can convert to a return rate by multiplying by 100. For example, a decimal dividend yield of 0.05 represents a return rate of 5%.
How do you figure out the annual dividends that a stock pays out per share? There are 2 ways of doing this:
- Add up the past 12 months of dividends. This gives you a historical, or backward-facing look.
- Multiply the most recent quarterly dividend by 4. This is typically considered the better way to get a forward-looking estimate of the company’s dividend return rate. For companies with a monthly dividend, you would instead multiply by 12. For companies that pay a dividend twice a year, you would instead multiply by 2, and so on.
How to calculate dividend yield
To calculate a stock’s dividend yield, just take the total annual dividends that the company pays out (using one of the methods above) and divide that number by the company’s current share price.
Let’s consider a company with a current share price of $100. Over the past year, the stock has paid out the following quarterly dividend payments:
- Q1: $0.75
- Q2: $0.75
- Q3: $0.77
- Q4: $0.77
Using the backward-looking method, add up all 4 payments and divide by 100. This method would result in a dividend yield of 3.04%.
Using the forward-looking method, take the most recent dividend payment and multiply by 4. Following this method, you’d have a slightly higher dividend yield of 3.08%.
FAQs about dividend yields
Do all companies pay dividends?
No, not all companies pay dividends. Large, established companies often do. Young or high-growth companies often do not.
Where can I find a company’s dividend yield?
Visit Fidelity’s stock research page, and search for the company’s name or ticker symbol. In the “Detailed quote” section of the page, look for “Estimated distribution rate/yield.” For dividend stocks the estimated distribution yield is the dividend yield.
How do I find companies with the highest dividend yield?
Fidelity customers can screen and sort companies by dividend yield using the Fidelity stock screener . However, as the next section explains further, just because a company has the highest dividend yield doesn’t necessarily mean it’s the strongest or highest-returning investment.
What is a good dividend yield?
It can be tempting to go with the stocks that offer the highest yields. After all, a high yield means you’re earning more from your investment, right? Not necessarily. Companies can decrease or stop their dividends at any time, so the current dividend yield is not a guaranteed return rate.
In fact, a very high dividend yield can actually be a red flag that the company is struggling. For example, it could indicate that:
- The share price has fallen significantly
- The dividend is at risk of being cut or stopped
That’s why dividend investors often focus instead on looking for steady dividend payers—companies that have a long track record of paying consistent dividends without cuts—instead of simply highest dividend payers.
It’s also important to note that high-growth companies often don’t pay dividends, because they choose instead to reinvest all of their profits back into the business. This can help fuel future earnings growth—potentially helping to lift the stock price down the line.
The key takeaway here is that a high dividend yield isn’t necessarily a good thing and a low dividend yield isn’t necessarily a bad thing.
What is the average dividend yield?
Dividend yield can vary significantly depending on the company and industry. Average dividend yields across the market can also shift over time. For example, dividend yields are often higher when interest rates are higher and lower when interest rates are lower.
That said, dividend yields of major market indexes can be helpful yardsticks. The dividend yield of the S&P 500® Index was 1.24% as of July 31, 2025.1
What affects dividend yield?
Again, dividend yield is directly affected by a stock’s share price and dividend payments. When either of these things change, it affects the stock’s dividend yield. Bear in mind that share prices are constantly in flux. So a company’s dividend yield can change even day to day.
How are dividend yields taxed?
A stock’s dividend yield is a financial ratio, not a payment to investors, so the dividend yield itself is not something that can be taxed. Dividend payments, on the other hand, are taxable.
Dividends are taxed only when held in taxable brokerage accounts, not in tax-advantaged accounts, like retirement accounts. When they are taxed, they’re considered either ordinary or qualified. An ordinary dividend is taxed at an investor’s ordinary income tax rate. Qualified dividends, on the other hand, are taxed at your capital gains tax rate, which is typically lower than your ordinary income tax rate.
For a dividend to be qualified, investors must generally meet certain holding period requirements.
Why is dividend yield important?
Dividend yield is an important factor to weigh before purchasing a stock, particularly if you’re buying a stock for its dividend income. Unlike the dollar value of a company’s dividend payments, dividend yield is a standardized metric, which means investors can use it to compare stocks with each other.
Just be sure to understand the metric’s limitations, and always do thorough research before buying individual stocks.