A forward dividend yield is used to project a company’s future annual dividend payouts. It is represented as a percentage of the current share price.
Forward dividend yield can prove useful for investors looking to make an investment decision in a company, but it should not be used in isolation as it has some limitations.
Learn more about forward dividend yield, how to calculate it, and its uses.
Definition and Examples of Forward Dividend Yield
A forward dividend yield represents a company’s expected annual dividend payouts over the next year. Like a standard dividend yield, it expresses the dividend payout in relation to the stock price as a percentage.
- Alternate name: Leading dividend yield, forward yield
For example, the forward dividend yield for Company Y is 2.20%. Assuming the stock price ($81.84) and payout remain the same, investors can expect to make $1.80 (2.20% of the stock price) per share in dividends over the next year.
How Do You Calculate Forward Dividend Yield?
To calculate the forward dividend yield, you would annualize the most recent dividend payment and then divide it by the stock price. Next, multiply the number by 100 to produce a percentage figure. Take note of the formula below as you read through the upcoming example.
Let’s say that Company X’s last quarterly dividend was $2 per share. The current stock price is $100. To annualize the dividend, you would multiply $2 by four since the company pays dividends quarterly, or four times per year. Assuming that Company X’s quarterly payment does not change, it would issue total dividends of $8 per share over the year.
- Most recent dividend, annualized: $8
- Stock price: $100
Now, let’s plug these numbers into the formula:
The forward dividend yield for Company X is 8%.
The company’s dividend schedule will affect your calculations when annualizing the dividend. Quarterly dividend payments are common, but some companies pay annually, biannually, or even monthly. If a company pays monthly dividends, for example, multiply the most recent dividend by 12 to annualize it.
How Does Forward Dividend Yield Work?
Forward dividend yields are best used for companies where dividend payments can be accurately predicted. Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, MI, told The Balance in an email that forward dividend yield should be used after researching the company’s dividend policy and stability.
“Does the company have a history of stable dividends which would provide comfort in projecting the current dividend forward?” Milan said. “And, does the company have a dividend policy where they declare the dividend on an annual basis and, even more so, preferably at the beginning of the calendar year? If that is the case, the investor can be fairly confident the declared dividend will be consistent [and] stable for the year going forward.”
Milan listed dividend aristocrats as examples of companies with reliable forward dividend yields. Dividend aristocrats, like Coca-Cola, have issued and steadily raised their dividends over at least 25 years.
Limitations of Forward Dividend Yield
But forward dividend yield has its limitations and should not be used as the sole basis for an investment decision.
Calculating the forward dividend yield for a company with unstable dividends may offer an inaccurate forecast.
In these cases, a trailing dividend yield provides a more reliable projection. This type of yield accounts for all actual dividends per share paid over the last twelve months—not just the most recent.
Applying trailing dividend yield to our earlier example, let’s say Company X issued the following dividends last year:
- March: $0.50 per share
- June: $1.00 per share
- September: $0.50 per share
- December: $2.00 per share
Company X paid a total of $4 per share in the past year. Now, let’s plug those numbers into the formula:
The trailing dividend yield is 4%.
Our earlier example of forward dividend yield considered only the most recent dividend payment ($2 per share). In this case, using a trailing dividend yield to account for all of last year’s dividends offers a more accurate forecast.
Difference Between Forward Dividend Yield and Trailing Dividend Yield
|Forward Dividend Yield||Trailing Dividend Yield|
|Uses the most recent dividend per share to project future dividends||Uses actual dividends per share paid over the last 12 months to project future dividends|
|Ideal for companies that issue stable dividends and announce their dividend policy||Ideal for companies with dividends that vary greatly|
What It Means for Individual Investors
You will likely rely on the forward dividend yield when your core strategy revolves around dividends, Milan said. He recommended that investors look at other factors, such as “balance sheet strength, debt coverage, forward P/E ratio, technical indicators, other fundamental indicators, [and] momentum indicators” when evaluating a company’s value, too.
Similar to a regular dividend yield, the forward dividend yield does not always determine a worthy investment. A higher yield may indicate a drop in the stock’s price due to financial setbacks—bankruptcy, possibly. Keep in mind that a higher yield also means a higher portion of the company’s revenue is not reinvested back into the company’s growth.
- A forward dividend yield is used to predict how much a company will pay in dividends in a future period
- A forward dividend yield represents a stock’s future dividend payout in relation to the stock price as a percentage.
- The accuracy for a forward dividend yield is higher for companies that issue stable dividends and announce their dividend policy.
- Investors should consider other factors alongside the forward dividend yield, such as balance sheet strength and debt coverage when evaluating a company stock’s value.