Income Investing Questions Answered: Which Yield Is Correct?

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I love hearing from my High-Yield Investing subscribers. Any time I get an email from a premium subscriber, whether it's in the form of a question, some constructive feedback, or simply a success story -- it reminds me that we've garnered quite the loyal following over the years.

One of the most common questions I get has to do with -- you guessed it, dividend yields .

The question usually goes something like this...

The dividend yields that are listed in High-Yield Investing sometimes differ from the yields I've found on various financial web sites. Which yields are correct?

This might sound like a simple question, but it's one that's worth addressing for a wider audience.

Dividend yields can be calculated in a number of different ways. Depending on how they are calculated, various websites may show different yields for the exact same security.

When payments vary greatly, the most reasonable calculation involves taking the last 12 months o f dividend payout s (trailing twelve months or TTM) and dividing that figure by the firm's current share price.

This is called a trailing yield .

For example, let's assume Company XYZ's current share price is $50. Let's also assume the firm has made the following dividend payments over the past year:

March -- $0.50 per share

June -- $0.50 per share

September -- $0.50 per share

December -- $1.00 per share

As you can see, Company XYZ has paid $2.50 per share in total dividends over the past twelve months. So in this example, XYZ sports a trailing dividend yield of 5% (calculated by taking the $2.50 in actual trailing dividend payments and dividing that figure by a $50 share price).

But it's important to keep in mind that this represents just one way of calculating yields. Some financial websites and other media sources report yields a bit differently -- instead of showing trailing yields, they list forward yields.

Unlike a trailing yield, a forward yield projects dividend payments over the next 12 months, and is best used when these payments can be predicted with reasonable accuracy. The forward yield takes the stock's latest declared dividend payment and annualizes it over the next 12 months.

Returning to our example, Company XYZ's most recent dividend payment was $1.00 per share. Assuming the firm's quarterly dividend payout remains at this new level, the firm will deliver total dividend payments of $4.00 per share in the coming year. Therefore, Company XYZ's forward yield is 8% (calculated by taking the $4.00 in projected future dividend payments and dividing that figure by a $50 share price).

This forward yield of 8% is very different from the trailing yield of 5% shown above. Both are correct, but they are simply calculated in a different manner.

In High-Yield Investing , we generally prefer to use trailing yields when possible, as they represent concrete dividend payments that a firm has already made. However, when a company has announced a regular dividend payout for the forthcoming 12 month period, we may use a forward yield to more accurately reflect what shareholders can expect to receive.

Things To Keep In Mind

To make matters even more complex, what counts as a dividend payment may also vary. Some web sites include all components of the payment, including ordinary dividends, short-term capital gains, long-term capital gains, return of capital, and one-time special payments.

Meanwhile, other sites may count certain parts of the distribution, but may exclude others based on their different tax treatment or the fact that they are not considered part of the "regular" dividend payment, or a variety of other reasons.

My research staff and I don't rely exclusively on any one website, but one that we like for information on share prices and dividend payments is Yahoo Finance. But it's best to go directly to the source whenever possible. Most companies list their historical distributions on their website, and declared distributions can usually be found in their press releases. We generally use this data, which comes directly from each respective company, to calculate the yields we present in our various newsletters.

The Takeaway

Bottom line, it's important to understand the difference between trailing yield vs. forward yield. Not only does it explain many of the discrepancies you'll find from different information sources, it can make a huge difference in what you'll actually earn from your investment.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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