How to calculate cash yield? Mastering this key indicator will make your investments more confident.

In recent years, more and more investors are turning their attention to listed companies with high dividend yields. The reason is simple—these companies can provide relatively stable cash returns, helping to hedge against market volatility. Especially during market downturns, investors shift from chasing high-growth stocks to seeking value stocks that can sustain regular dividends. However, for beginners, how to use dividend yield to accurately select stocks remains a challenge. This article will build a comprehensive dividend yield investment framework, covering basic concepts, calculation logic, investment traps, and practical applications.

What is Dividend Yield: An Indicator for Dialogue Between Dividends and Stock Price

Dividend Yield is essentially a financial ratio that reflects the proportion of cash dividends paid relative to the stock market price each year. Unlike simply looking at the dividend amount, dividend yield incorporates stock price factors, enabling fair comparisons across different companies.

For example, Company A’s stock price is 100 yuan with a dividend of 5 yuan, and Company B’s stock price is 50 yuan with a dividend of 3 yuan. If only considering dividend amounts, Company A appears higher. But when factoring in stock price, Company A’s yield is 5%, and Company B’s is 6%. Investing 10,000 yuan in Company B yields more cash returns.

The cash dividend yields vary significantly across industries and companies. Growth-stage companies tend to reinvest profits into expanding their business and are less interested in dividends; mature, stable companies are more willing to pay regular dividends, with increasing dividend amounts over the years.

From an industry perspective, sectors like Real Estate Investment Trusts (REITs), utilities, consumer staples, and energy infrastructure generally have higher dividend yields than technology, consumer discretionary, and other industries. This reflects differences in business models and growth stages across sectors.

How to Calculate Dividend Yield: Three Elements in One Formula

The calculation of dividend yield is straightforward but easy to trip over:

Dividend Yield = Annual Dividends ÷ Stock Price × 100%

For example: a company’s stock price is $10, with an annual dividend of $1, then the dividend yield = 1 ÷ 10 × 100% = 10%.

However, a common overlooked detail is the dividend frequency. Most US stocks pay quarterly dividends, but some pay monthly, such as the REIT Realty Income (O.US), which pays monthly. If Realty Income pays $0.25 per month, that’s $3 annually. Another company pays quarterly $1.52 per share, totaling only $6 annually. When comparing yields, it’s essential to convert all dividends to an annual basis; otherwise, the data is meaningless.

The following table shows the correct comparison method:

Both pay dividends, but Realty Income’s yield is more than twice that of McDonald’s, which isn’t obvious if only looking at a single payment.

Why Rising Dividend Yield Isn’t Always a Good Signal

This is a common pitfall for investors. Since the numerator of dividend yield is dividends paid, and the denominator is stock price, an increase in yield can result from two situations:

Scenario 1: Dividends increase, stock price unchanged → Company’s profitability improves, which is a positive signal.

Scenario 2: Dividends stay the same, stock price drops → The company may be in trouble, and the stock is being sold off by the market; this is a risk signal.

Take ExxonMobil (XOM) as an example. In 2020, its dividend yield soared to 6.1%, but by 2022, it dropped to 3.3%, a decline of over 40 percentage points. At first glance, it looks like the company cut dividends, but the truth is—dividends actually increased steadily (from $3.48 to $3.65), while the stock price rose sharply, diluting the yield. This indicates the company’s fundamentals are improving, and the stock is being revalued by the market.

Payout Ratio: A Better Indicator to See a Company’s True Condition

Investors should also consider a second key indicator: Payout Ratio = Total Dividends ÷ Net Profit.

The payout ratio reflects how much profit the company distributes to shareholders. If the dividend yield keeps rising but the payout ratio also climbs, and the company’s net profit isn’t growing, it indicates the company is overextending—paying out more money to shareholders while its business isn’t progressing. This is a warning sign.

For example, ExxonMobil in 2020 showed this situation: dividends remained unchanged, but net profit was negative (loss), making the dividend yield appear very high. In reality, the company was using reserves or borrowing to pay dividends, which is unsustainable. Just seeing a high dividend yield can tempt you into thinking it’s a bargain, but it might be a minefield.

Three Major Advantages of Investing in High Dividend Yield Stocks

1. Stable Cash Inflows

Stock market fluctuations are unpredictable, but dividends tend to be relatively fixed. A stock with a 4% dividend yield, holding 100,000 yuan, can generate a steady 4,000 yuan annually. This is especially attractive for retirees relying on dividends for living expenses—no need to wait for stock price appreciation to get returns.

2. Shortcut to Screening Quality Companies

Only companies with strong profitability and sufficient cash flow can pay regular dividends. Loss-making or marginal companies simply can’t afford dividends. Therefore, high dividend yield stocks often represent solid fundamentals, at least during the dividend payment period, and the company’s operations are healthy.

3. Compound Effect for Excess Returns

Suppose an investor invests $10,000 in a stock priced at $20, with a 5% dividend yield. In the first year, they receive $500 in dividends, which they reinvest to buy 25 more shares. The second year, they hold 525 shares, earning dividends on the new total, and so on. Over five years, the principal grows to $12,240, a 22.4% increase, not counting stock price appreciation.

Three Precautions When Investing in High Dividend Yield Stocks

1. Don’t Be Blinded by High Yield

A dividend yield over 4% is high, but it’s crucial to understand why. Is the company increasing dividends, or is the stock price collapsing? Reviewing dividend history and stock price trends over the past 3-5 years can help identify the real situation.

2. Also Check Payout Ratio and Debt Levels

Even if the dividend yield is high, if the payout ratio exceeds 80%, debt levels are rising, or free cash flow is deteriorating, caution is warranted. These are signs that the company may struggle to sustain high dividends.

3. Be Cautious When Comparing Across Industries

REITs often have dividend yields three times higher than manufacturing companies, but this isn’t because REITs are inherently better—industry characteristics matter. REITs are legally required to pay dividends, while many tech companies choose not to. Comparing within the same industry is more meaningful than cross-industry comparisons.

How to Quickly Screen for High Dividend Yield Stocks

Using stock screening tools (like Dividend.com) can help find stocks meeting your criteria:

1. Access the screener function
2. Set minimum dividend yield (usually above 4% to be considered high)
3. Optionally, set market cap, dividend growth years, etc.
4. Sort by YIELD to see top-ranked stocks
5. Review dividend history, payout ratio, debt levels, and other detailed data

Review of High Dividend Yield Stocks from 2020-2023

2023 High Dividend Yield Stocks (Yield >4%)

2022 High Dividend Yield Stocks (Yield >4%)

2021 High Dividend Yield Stocks (Yield >4%)

2020 High Dividend Yield Stocks (Yield >4%)

Common Questions About Dividend Yield

Q: Are stocks with high dividend yields always worth buying?

A: Not necessarily. A high dividend yield is only a preliminary screening criterion. You also need to check payout ratio, dividend growth history, debt levels, free cash flow, and other comprehensive indicators. Some stocks have high yields because their prices have plummeted, hiding risks behind the high yield.

Q: How to distinguish the authenticity of dividend yield?

A: Review dividend payments and stock price trends over the past 3-5 years. If dividends are steadily increasing and stock prices are relatively stable, it’s a genuine high yield. If dividends remain unchanged while stock prices have fallen sharply, the yield is fake.

Q: What causes dividend yield to change?

A: Changes in dividends (company actively adjusting), stock price fluctuations (market pricing), and dividend frequency adjustments (affecting annual calculation) all influence yield. The yield of the same stock fluctuates daily as stock prices change.

Q: How to use dividend yield for investment?

A: Don’t rely solely on dividend yield as the only stock selection criterion. First, filter stocks with yields above 4%, then examine dividend stability, payout ratio, industry outlook, company competitiveness, and other factors before making a purchase decision.