The dividend yield of a share is the ratio of annualised cash dividends to the share's current market price. It is usually expressed as a percentage and is commonly calculated by dividing the annual dividend per share by the current share price. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some investors as indicative that the market is still overvalued.

Dow Industrials

The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred in 1932 when it yielded over 15%, which was years after the famous stock market collapse of 1929, when it yielded only 3.1%.

With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.

The Dogs of the Dow is a popular investment strategy which invests in the ten highest dividend yield Dow stocks at the beginning of each calendar year.

S&P 500

In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company earnings increased more slowly than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings.

Limitations and pitfalls

Dividend yield reflects dividend income relative to the current share price, but dividends can be reduced or discontinued. MSCI notes that trailing yields can rise when prices fall and may then decline if dividends are reduced or stopped, a pattern sometimes described as a "yield trap".

</references>

  • Understanding dividend yields by Investopedia.
  • Dividend Yields by Yahoo Education Center.
  • Dividend Yield Calculator

Further reading

  • Cohen, R.D. (2002, November) "The Relationship Between the Equity Risk Premium, Duration and Dividend Yield" Wilmott Magazine, pp 84–97.