Yield is a starting point, not a verdict
Dividend yield answers a simple question: for every euro you invest today, how much income does the company pay you back each year? It is calculated as the annual dividend per share divided by the share price. A $2 dividend on a $50 stock is a 4% yield — invest $10,000 and you would collect roughly $400 a year before tax.
But yield alone can mislead. Because it moves inversely with price, a falling share price makes the yield climb — so the highest yields on any screen are often the riskiest companies, where the market is quietly pricing in a dividend cut. A genuinely attractive yield is one that is covered: paid comfortably out of free cash flow, with a history of increases behind it and a durable business to sustain it.
The other half of the story is growth. A modest 3% yield that rises 8% a year becomes a large yield on your original cost within a decade — and reinvesting those dividends compounds the effect. See how that plays out over time in the compound interest calculator, or learn the mechanics in the dividends lesson.
Frequently asked questions
What is dividend yield?
Dividend yield is the annual dividend a company pays expressed as a percentage of its share price. You calculate it by dividing the annual dividend per share by the current share price and multiplying by 100. A stock paying $2 a year at a $50 price yields 4%.
How do I calculate dividend yield?
Dividend Yield = (Annual Dividend per Share ÷ Share Price) × 100. If a company pays $0.50 per quarter, its annual dividend is $2.00; at a $50 share price that is a 4% yield. Enter your own numbers above to calculate it instantly, along with the income a given investment would produce.
What is a good dividend yield?
It depends on the company and sector. Broadly, 2–4% is common for healthy dividend growers, 4–6% for mature, higher-payout businesses, and anything much above 6–7% deserves scrutiny — an unusually high yield often reflects a depressed price that signals risk rather than a bargain. Sustainability matters far more than the headline number.
Why can a high dividend yield be a trap?
Because yield rises as price falls. When a stock's price drops sharply — often because the market expects trouble — the yield mechanically spikes. If the underlying dividend is then cut, investors lose both the income and further capital. A 'yield trap' looks generous on screen but is really the market pricing in a likely cut. Always check that free cash flow comfortably covers the payout.
What is yield on cost?
Yield on cost is the annual dividend divided by the price you originally paid, not today's price. If you bought at $50 with a $2 dividend (4% yield) and the company later raises the dividend to $4, your yield on cost is 8% — even though new buyers at a higher price get less. It is why long-term dividend-growth investors care about the durability of dividend increases.