Financial ratios are helpful metrics that investors, businesses, and shareholders use to evaluate a company's financial health. Ratios are usually expressed in percentage form.
But remember, you need to do more than calculate the ratio—you need to interpret the ratio too. For instance, you might run the dividend yield formula and find that a company's average dividend yield is 12%. While the number looks high on paper, analyzing its context and crunching other numbers like your return on investment can clarify how good (or bad) this investment opportunity really is.
Some companies pay dividends to their shareholders on a monthly or quarterly basis. However, the dividend yield formula typically requires you to divide a company's annual dividends by its current stock price. So to calculate the right number for the formula, you need to annualize the company's dividends.
For instance, if the company pays shareholders monthly, you'll multiply that number by 12 to get the annualized dividend. And if the company pays shareholders quarterly, you'll multiply that number by four.
A forward dividend yield is a company's projected dividend yield. To estimate how much a company is expected to pay out in dividends, you'll calculate the company's annualized dividend based on its most recent dividend payments. Then you'll use the dividend yield formula (annualized dividend divided by current stock price) to calculate the forward dividend yield.
A trailing dividend yield is just the opposite: it represents what the company did pay out in dividends over the past 12 months. If you hope to invest in a specific business, its trailing dividend yield shows you exactly how much prior investors did receive in dividends over the last year. If stock prices stay the same—and remember, that's a big if—you can generally assume to be paid a similar dividend. On the other hand, a forward dividend is just an estimate of what dividends could look like down the road.
Both types of dividend yields assume the price of stock will stay constant, but as any stockbroker knows, the stock market's main constant is its inconsistency. While you should definitely calculate both the forward and trailing dividend yield, remember that you're only getting an estimate, not a guaranteed payout.
No, not all companies pay dividends. In fact, many don't, especially new companies. At the outset, many business owners choose to reinvest as many of their profits as they can so they can grow their business. Paying out shareholders in cash at the end of a year or quarter is more affordable for bigger, established companies, though newer companies wanting to attract investors might issue dividend-paying stocks.
Want to find out which companies do pay shareholder dividends? You can check financial publications like the Wall Street Journal's Dividends page or the Security and Exchange Commission's investment search on investor.gov to find some starting points.