Forward Dividend Yield – Definition

Cite this article as:"Forward Dividend Yield – Definition," in The Business Professor, updated December 31, 2018, last accessed August 11, 2020, https://thebusinessprofessor.com/lesson/forward-dividend-yield-defined/.

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Forward Dividend Yield Definition

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 stock’s price.

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.

A Little More on Forward Dividend Yield

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 stock’s 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 scenario’s 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.

References for Forward Dividend Yield

Academic Research on Forward Dividend Yield

Dividend yields and expected stock returns, Fama, E. F., & French, K. R. (1988). Journal of financial economics22(1), 3-25. This paper studies the power of dividend yields to forecast stock returns, measured by regression R2, and finds that it increases with the return horizon. The authors provide differennt explantions for this event.

Stock returns, dividend yield, and book-to-market ratio, Jiang, X., & Lee, B. S. (2007). Journal of Banking & Finance31(2), 455-475. This paper presents a model that explains future profitability and excess stock returns in terms of a linear combination of log book-to-market ratio and log dividend yield, given the controversies surrounding the use of the dividend yield model in analysing stock market valuations to cash flow fundamentals.

From dividend yield to discounted cash flow: a history of UK and US equity valuation techniques, Rutterford, J. (2004). Accounting, Business & Financial History14(2), 115-149. This article explores how, as capital markets developed, equity valuation methods changed. The history of equity valuation is described, from its early origins during the South Sea Bubble, through the new issue boom of the nineteenth century and the stock market booms of the 1920s and 1950s. This article compares developments in the UK and the US, and concludes with a discussion of the relatively slow introduction of the dividend discount model and of discounted cash flow as equity valuation tools on both sides of the Atlantic.

Equity premia as low as three percent? Evidence from analysts’ earnings forecasts for domestic and international stock markets, Claus, J., & Thomas, J. (2001). The Journal of Finance56(5), 1629-1666. The returns earned by U.S. equities since 1926 exceed estimates derived from theory, from other periods and markets, and from surveys of institutional investors. In this paper, the authors estimate the equity premium from the discount rate that equates market valuations with prevailing expectations of future flows.

The market’s differential reactions to forwardlooking and backwardlooking dividend changes, Lee, B. S., & Yan, N. A. (2003). Journal of Financial Research26(4), 449-468. Recent studies find that dividend changes reflect mostly current and past earnings but not future earnings. Inn this paper, the authors provide a model in which not all dividend changes contain new information about future earnings. This model aims to identify the two types of dividend changes and predicts that the market will respond strongly only to forward‐looking dividend changes.

Selecting internet company stocks using a combined DEA and AHP approach, Ho, C. T. B., & Oh, K. B. (2010). International Journal of Systems Science41(3), 325-336. The development of an efficient and scientific decision rule for selecting Internet stocks is a necessary and valuable investment tool. As a result, this article adopts two mathematical approaches: data envelopment analysis (DEA) and analytical hierarchical process (AHP) to construct a stock selection framework using 31 listed US Internet companies. The empirical results from this study form the basis for discussion of the combined DEA and AHP approach for selecting Internet stocks.

A dynamic model for hard-to-borrow stocks, Avellaneda, M., & Lipkin, M. (2009). Risk22(6), 92-97. In this paper, the authors study the price-evolution of stocks that are subject to restrictions on short-selling, generically referred to as hard-to-borrow. Findings showthat short-sale restrictions result in increased prices and volatilities. The paper also finds that stocks that do not pay a dividend may have calls subject to early exercise.

The role of dividends in valuation models used by analysts and fund managers, Barker, R. G. (1999). European Accounting Review8(2), 195-218. This paper analyses the role of dividends used by analysts and managers in valuation model of stock investments.

The changing functional relation between stock returns and dividend yields, Christie, W. G., & Huang, R. D. (1994). Journal of Empirical Finance1(2), 161-191. This paper provides a new approach for evaluating whether expected stock returns compensate investors for the tax differential between dividends and capital gains. This paper shows that no exploitable systematic relation exists between dividend yields and expected returns.

Surprise! Higher dividends= higher earnings growth, Arnott, R. D., & Asness, C. S. (2003). Financial Analysts Journal59(1), 70-87. This literature investigates whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The author aims to show that faster future earnings growth is mainly associated with managers signaling their earnings expectations through dividends and engaging in inefficienct empire buildings as opposed to the belief that substantial reinvestment of retained earnings will fuel faster future earnings growth.

The supply of stock market returns, Ibbotson, R. G., & Chen, P. (2001). Research Paper, Ibbotson Associates Inc., Mimeograph. In this paper, the authors estimate the forward-looking long-term equity risk by extrapolating the way it participated in the real economy. Using data from 1926-2000 historical equity returns into supply factors including inflation, earnings, dividends, price to earnings ratio, dividend payout ratio, book value, return on equity, and GDP per capita, this paper presents lots of finndings. Further discussion is carried out in the text.

Measuring the equity risk premium, Best, P., & Byrne, A. (2001). Journal of Asset Management1(3), 245-256. This paper uses surveys of economic forecasts to derive a forward-looking estimate of the US equity risk premium (ERP) relative to government bonds.

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