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Dividend yield vs earnings yield

Dividend yield is cash paid over price. Earnings yield is profit over price. A $2.00 dividend on a $41.60 Gordon price is 4.81 percent trailing and 5 percent implied. A $50 share on $2.50 of EPS is a 5 percent earnings yield. Those 5 percents are different firms.

 Dividend yieldEarnings yield
NumeratorA dividend. Cash that left the firm.Earnings per share, or total earnings against market cap.
Teaching sheetA $2.00 dividend just paid, Gordon price $41.60. Trailing yield 4.81 percent. Implied yield 5 percent on next year's $2.08.A $50 share on $2.50 of EPS, 100,000,000 shares. P/E 20. Earnings yield 5 percent on $250,000,000 of earnings and $5,000,000,000 of market cap.
A second sheetA $3.50 dividend on a $72.10 price. Trailing 4.85 percent. Implied 5 percent again, because k−gk - g is 5 percent again.The same $50 price on $5.00 of EPS. P/E 10. Earnings yield 10 percent on $500,000,000 of earnings.
Zero-growth / cheaper multipleA $2.00 dividend that never grows, priced at $22.22, yields 9 percent both ways, equal to kk.An $80 share on $2.50 of EPS and 50,000,000 shares is a P/E of 32 and a 3.125 percent earnings yield on $4,000,000,000 of market cap.
What it is silent onProfit that was not paid out.Cash that was actually sent. A 5 percent earnings yield can sit next to a 0 percent dividend.
When you would pick itSizing the cash coupon on the price you pay.Reading the P/E the other way up, as an earnings rate implied by the multiple.
On this page

Two numerators, two firms

The Gordon sheet and the P/E sheet are not one company. On the dividend sheet a $2.00 dividend just paid, growing at 4 percent, with a 9 percent required return, is a $2.08 next dividend and a $41.60 price. Trailing dividend yield is 4.81 percent. Implied yield is 5 percent, equal to k−gk - g.

On the earnings sheet a $50 share with $2.50 of EPS and 100,000,000 shares is a P/E of 20, a market cap of $5,000,000,000, and total earnings of $250,000,000. Earnings yield is 5 percent, which is 1/201 / 20.

Both print a 5 percent. One is next year's dividend over a Gordon price. The other is this year's earnings over a share price. Lining them up as if they were one yield is how a payout and a profit get mashed.

How dividend yield works is D/PD / P. How earnings yield works is EPS/P\text{EPS} / P. A dividend is cash. Price to earnings is the multiple the earnings yield flips.

A firm can earn 5 percent and pay none of it

Earnings yield does not require a dividend. Dividend yield does not require a profit this year, though a firm that pays without earning is paying out of the balance sheet.

The 10 percent earnings yield on the second P/E sheet is a more profitable year on a still-$50 share, not a fatter cheque. The 4.85 percent trailing dividend yield on the $72.10 sheet is last year's cash over that price, not a 5 percent implied Gordon yield wearing another name.

This is educational material, not financial advice.

Worked examples

Gordon: \$2.00 on a \$41.60 price

Dividend just paid $2.00, growth 4 percent, required return 9 percent. Price and the two dividend yields?

  1. Next year's dividend: $2.08. Price: $41.60.
  2. Implied yield: 5 percent. Trailing yield: 4.81 percent.

Price $41.60. Implied dividend yield 5 percent. Trailing 4.81 percent.

Gordon: \$3.50 on a \$72.10 price

Dividend just paid $3.50, growth 3 percent, required return 8 percent.

  1. Next year's dividend: $3.605. Price: $72.10.
  2. Implied yield 5 percent. Trailing yield 4.85 percent.

Price $72.10. Implied 5 percent. Trailing 4.85 percent.

Gordon: zero growth at \$22.22

A $2.00 dividend that never grows, required return 9 percent.

  1. Price: $22.22.
  2. Both yields 9 percent.

Price $22.22. Trailing and implied yields are both 9 percent.

Earnings: a \$50 share on \$2.50 of EPS

Price $50, EPS $2.50, 100,000,000 shares. What is earnings yield?

  1. P/E: 20. Market cap: $5,000,000,000. Earnings: $250,000,000.
  2. Earnings yield: 5 percent.

P/E is 20. Market cap is $5,000,000,000. Earnings are $250,000,000. Earnings yield is 5 percent.

Earnings: the same price on \$5.00 of EPS

Keep $50 and 100,000,000 shares. EPS $5.00.

  1. P/E: 10. Market cap is still $5,000,000,000. Earnings: $500,000,000.
  2. Yield: 10 percent.

P/E falls to 10. Earnings are $500,000,000. Earnings yield is 10 percent.

Earnings: an \$80 share on a smaller count

Price $80, EPS $2.50, shares 50,000,000.

  1. P/E: 32. Market cap: $4,000,000,000. Earnings: $125,000,000.
  2. Yield: 3.125 percent.

P/E is 32. Market cap is $4,000,000,000. Earnings are $125,000,000. Earnings yield is 3.125 percent.

Common questions

Why do both print 5 percent on the first sheets?

Coincidence of two teaching sheets, not an identity. The 5 percent implied dividend yield is k−gk - g on a $41.60 Gordon price. The 5 percent earnings yield is 1/201 / 20 on a $50 share. Different firms, different numerators.

Can earnings yield be far above dividend yield?

Yes. That gap is profit not paid out. A firm can print a 5 percent earnings yield and a 0 percent dividend yield.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.