Dividend Yield

What it is

Dividend yield is the annual dividend a company pays expressed as a percentage of the current share price. If Lloyds pays 3.2p per share in annual dividends and the share price is 56p, the yield is 5.7%. That's the income return you receive just for holding the stock — before any capital gain or loss.

It's the closest thing equity investing has to an interest rate.

How to calculate it

In the UK, most companies pay twice a year — an interim dividend (usually smaller) and a final dividend. Some pay quarterly. A few blue chips like National Grid pay predictable annual amounts. Always use the full annual dividend, not just the last payment, unless the company has already changed its policy.

Watch for special dividends — one-off payments that inflate the trailing yield. Rio Tinto and BHP have a history of bumper specials tied to commodity earnings. Strip these out before comparing yields across companies.

What it actually tells you

A high yield is not automatically good news. This is the most important thing to understand about dividend yield.

Because yield = dividend ÷ price, the yield rises when the price falls. A stock yielding 9% may be doing so because the share price has collapsed — not because the company is being generous. The market may be pricing in a dividend cut before it's officially announced. This is called a yield trap, and UK income investors walk into it repeatedly.

The FTSE 100 yields roughly 3.5–4% on average. Any individual stock yielding materially above that deserves a closer look at the sustainability of the payment.

The sustainability question

Before you get excited about a 7% yield, ask: can the company actually afford it?

That's where dividend cover comes in (earnings per share divided by dividend per share). A cover of 2.0x means the company is paying out half its earnings — comfortable. A cover of 1.0x means 100% payout — sustainable only if earnings are rock solid. Below 1.0x, the dividend is being funded by debt or reserves, which is almost always temporary.

Free cash flow cover is even better than earnings cover, because cash is real. Some companies report strong earnings but convert little of that to actual cash due to capital expenditure requirements or working capital movements.

UK market context

The UK stock market yields significantly more than the US market — historically around 3–4% versus 1.5–2% for the S&P 500. This reflects both the composition of the FTSE (more mature, capital-light businesses like financials and utilities) and a cultural preference among UK listed companies for returning cash to shareholders.

The FTSE 100 companies with the most reliable dividend track records — sometimes called the UK Dividend Aristocrats — include names like National Grid, British American Tobacco, and HSBC. Reliability matters more than headline yield for income-focused portfolios.

High-yield doesn't mean high-return. The arithmetic of compounding works in your favour when dividends are reinvested into a growing business — not when they're paid out of a shrinking one.

Not financial advice. Past dividends are not a guarantee of future payments.