Forward Dividend Yield - Explained
What is a Forward Dividend Yield?
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Table of ContentsWhat is a Forward Dividend Yield?Example of Forward Dividend YieldHow Does a Forward Dividend Yield Work?Forward Dividend Yield & Corporate Dividend Policy
What is a Forward Dividend Yield?
The Forward Dividend Yield is a projection or estimate or the company's annual dividend as a percentage of its existing stock price. The most recent dividend payment is used to measure and annualize the projected dividend of the year. You can calculate the forward dividend yield by dividing the projected annual dividend payment by the existing stocks price.
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Example of Forward Dividend Yield
For instance, if a business pays a first quarterly dividend of $.25 per share and holders have confidence that this will continue for the subsequent quarters, the business is expected to pay $1.00 as dividends within a year. The forward dividend yield will become 10% if the stock price is $10.
How Does a Forward Dividend Yield Work?
The forward dividend yield can be compared to other dividend yield metrics:
- Trailing Dividend Yield - This is the opposite of the forward dividend yield. It represents the actual dividend payments of the company in comparison to share price over the last 12 months.
- Indicated Dividend Yield - This shows a stocks return on the basis of their existing indicated dividend. You can find indicated yield by multiplying the last dividend by total yearly dividend payments. Then divide the result with the latest share price. For instance, if stock is being traded at $100 and has the last paid quarterly dividend of $0.50, the indicated yield is: Indicated Yield of Stock ABC = $0.50 X 4 / $100 = 2%.
Forward Dividend Yield & Corporate Dividend Policy
The dividend policy of the company is determined by its board of directors. Usually, big companies issue dividends, but growing businesses often use excess profits for the research, development, and business expansion. One of common dividend policies is stable dividend policy, wherein the company issues dividends irrespective of the earning level. The stable dividend policy aims to align business's goal for strategic growth irrespective of the quarterly earnings volatility. For a constant dividend policy, a dividend is issued every year as per the percentage of the business earnings. Constant dividends scenarios investors are exposed to company earnings volatility. In a residual dividend policy, anything is paid after company's own capital expenditures and needs for working capital are met.