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 economics, 22(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 & Finance, 31(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 History, 14(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.