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Income yield vs dividend yield

Income yield is cash received in the window over the beginning value. $3 on a $100 holding is 3 percent. Dividend yield is an annual dividend over price. A $2.00 dividend on a $41.60 Gordon price is 4.81 percent trailing. Those are two firms.

 Income yieldDividend yield
FormulaD/P0D / P_0 on one holding period. Income added once.Trailing D0/PD_0 / P. Implied D1/PD_1 / P.
Teaching sheetBegin $100, end $105, income $3. Income yield 3 percent. Holding-period return 8 percent.A $2.00 dividend just paid, Gordon price $41.60. Trailing yield 4.81 percent. Implied yield 5 percent on next year's $2.08.
The year in the numeratorWhatever cash arrived in this window. The formula does not know the dates.Trailing uses the dividend just paid. Implied uses next year. Name the year before lining two yields up.
ReinvestmentThe $3 is added once. The ending price stays $105.A yield, not a total return. Gordon growth prices a growing coupon. It does not add DD onto a separate finish.
What it is silent onThe annual indicated dividend, and the Gordon k−gk - g spread.Price change in a holding window. The 4.81 percent is not the 8 percent holding-period return.
Two firmsThe $100 holding. Do not paste $3 onto the $41.60 price.The Gordon share. Do not paste $2.00 onto the $100 start.
On this page

Two numerators, two firms

The holding-period sheet and the Gordon sheet are not one company.

Income yield is cash received in the window over the start:

income yield=DP0\text{income yield} = \frac{D}{P_0}

On a $100 start, a $105 finish and $3 of income, income yield is 3 percent. Price change is 5 percent. Holding-period return is 8 percent. How income yield works owns the 3 percent. How total return works owns the 8 percent. The $3 is added once, not reinvested.

Dividend yield is a dividend over the share price. On the published Gordon sheet a $2.00 dividend just paid, growing at 4 percent, with a 9 percent required return, is a $2.08 dividend next year and a price of $41.60. Trailing yield is 4.81 percent. Implied yield is 5 percent, equal to k−gk - g. How dividend yield works owns those two yields. How the Gordon growth model works owns the $41.60 price.

Do not paste the $3 onto the $41.60 price, and do not paste the $2.00 onto the $100 start. A yield family name is not a shared sheet.

One window is not an annual coupon

Income yield does not know whether the window was a month or a year. Dividend yield names the year in the numerator. Mixing a 3 percent income slice with a 4.81 percent trailing dividend yield is how two firms get mashed into one coupon.

Implied dividend yield on that Gordon sheet is 5 percent because 9−4=59 - 4 = 5. That 5 percent is k−gk - g, not the 5 percent price change on the $100 holding, and not the 5 percent income yield on a different flat-price sheet this page does not take.

The total return calculator is the one-period split. The dividend discount calculator is the Gordon price. This is educational material, not financial advice.

Worked examples

Income yield: \$3 on a \$100 start

A holding starts at $100, ends at $105, and pays $3 of income in the window. What is income yield?

  1. Income yield: 3/100=0.033 / 100 = 0.03, which is 3 percent.
  2. Price change: (105−100)/100=0.05(105 - 100) / 100 = 0.05, which is 5 percent.
  3. Holding-period return: (105−100+3)/100=0.08(105 - 100 + 3) / 100 = 0.08, which is 8 percent.

Income yield is 3 percent. Price change is 5 percent. Holding-period return is 8 percent. Begin $100, end $105, income $3. That 3 percent is not a dividend yield.

Dividend yield: \$2.00 on a \$41.60 Gordon price

The dividend just paid is $2.00. Growth is 4 percent forever. Required return is 9 percent. What is the price, and what are the two yields?

  1. Next year's dividend: 2.00×1.04=2.082.00 \times 1.04 = 2.08, so $2.08.
  2. Price: 2.08/(0.09−0.04)=2.08/0.05=41.602.08 / (0.09 - 0.04) = 2.08 / 0.05 = 41.60, so $41.60.
  3. Implied yield: 2.08/41.60=0.052.08 / 41.60 = 0.05, 5 percent, which equals 9−49 - 4.
  4. Trailing yield: 2.00/41.60=0.04812.00 / 41.60 = 0.0481, 4.81 percent.

The price is $41.60. Next year's dividend is $2.08. Implied yield is 5 percent. Trailing yield, on the $2.00 just paid, is 4.81 percent. This is a different firm from the $100 holding.

Common questions

Why can I not divide \$3 by \$41.60?

Because those dollars sit on two firms. The $3 is income on a $100 holding. The $41.60 is a Gordon price on a $2.00 dividend. Pasting them produces a yield nobody's sheet printed.

Is the 3 percent the same object as the 5 percent implied yield?

No. The 3 percent is $3 over $100 on one window. The 5 percent implied dividend yield is $2.08 over $41.60, which equals required return minus growth on the Gordon sheet.

Does income yield assume reinvestment?

No. The $3 is added once. The ending price stays $105. Dividend yield is not a reinvestment model either. It is cash over price.

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.