How dividend yield works

Dividend yield is a dividend divided by the price of the share. The year in the numerator has to be named.

Trailing yield uses the dividend just paid:

$$\text{trailing yield} = \frac{D_0}{P}$$

Implied, or forward, yield uses next year's:

$$\text{implied yield} = \frac{D_1}{P}$$

Gordon growth prices the share as $P = D_1 / (k - g)$. Rearranged, $D_1 / P = k - g$. Implied yield equals the spread in the denominator, always, on that identity.

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 $2.00 / 41.60$, 4.81 percent. Implied yield is $2.08 / 41.60$, 5 percent, which is $9 - 4$.

The dividend discount calculator on this page is that price. The Gordon growth explorer holds the dividend still and lets you drag $g$. How the Gordon growth model works owns $P$. This page owns $D / P$.

A $3.50 dividend just paid, growing at 3 percent, required return 8 percent. Next year's dividend is $3.605. The price is $72.10. Implied yield is 5 percent again, because $k - g$ is 5 percent again.

Trailing yield is $3.50 / 72.10$, 4.85 percent. It is not 4.81 percent, and it is not 5 percent. The dividend just paid is a different share of a different price, even though the implied yield matched the first sheet.

Two names can print the same implied yield and different trailing yields. The implied number is $k - g$. The trailing number is last year's cash over today's price.

Keep the $2.00 dividend and the 9 percent required return. Set growth to 0. Next year's dividend is still $2.00. The price is $22.22. Trailing yield is $2.00 / 22.22$, 9 percent. Implied yield is 9 percent. Both equal $k$.

With no growth you are not paying for a rising coupon. The whole required return shows up as yield, and there is no gap between last year and next year.

Earnings yield is profit over price. Dividend yield is cash paid over price. A firm can earn 5 percent of price and pay none of it out. How earnings yield works is that other fraction. Dividend yield against earnings yield is the pair, on two different teaching sheets.

A yield quoted without naming the cash in the numerator is not a number anyone can use. Coupon yield, earnings yield, and dividend yield share a family name and do not share a numerator.

Trailing yield does not know next year's dividend. A cut, a special, or a skip moves $D_1$ without moving $D_0$ until the calendar catches up. Implied yield on a Gordon sheet assumes a constant $g$ forever, which is a model, not a promise.

Mixing trailing yield on one name with implied yield on another is how one firm looks like two. Name the year before lining two yields up.

It is not a screen for cheap shares, not a payout forecast, and not a two-stage DCF. The three sheets are a $2.00 dividend on a $41.60 price (4.81 percent trailing, 5 percent implied), a $3.50 dividend on a $72.10 price (4.85 percent trailing, 5 percent implied), and a $2.00 level dividend on a $22.22 price (9 percent both ways). This is educational material, not financial advice.