Dividend yield

What it means

Dividend yield is the annual dividend per share as a percentage of the share price. If a share costs 50 euros and the company pays 2 euros in dividends a year, the yield is 4 percent. It shows the income an investor receives on capital regardless of price changes.

It is used mainly to compare shares of stable companies such as utilities, banks or consumer goods makers that pay dividends regularly. Growth companies often pay no dividends at all and reinvest their profits.

Yield should be read together with the dividend payout ratio and the P/E ratio. A high yield may mean a cheap share, but it may also mean the price has fallen because of problems and the market expects a dividend cut.

How it works in practice

It is calculated from dividends over the past 12 months or from the expected dividend for the next year. When comparing shares, use the same method, or you end up comparing figures that are not comparable.

When assessing yield, remember withholding tax. Dividends on foreign shares are taxed in the source country and sometimes in Slovakia as well, so the actual net yield after tax can be well below the gross percentage shown in overviews.

A company holding shares as a financial investment books dividends received as financial income. Dividends from Slovak and many foreign companies are not taxable for a legal entity, while those from non-treaty states are taxed at a higher rate.

What to watch out for

A high dividend yield does not guarantee a good investment. A company may pay out more than it earns and fund dividends with debt, which is not sustainable in the long run. Look at cash flow and leverage, not just the yield.

After a dividend is paid, the share price usually falls by roughly the dividend amount. Buying a share just before the record date for the dividend may therefore not pay off, especially once fees and taxes are counted.