What is dividend yield?
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its current share price. Expressed as a percentage, it provides investors with a quick way to compare the income potential of different shares — particularly those listed on the Australian Securities Exchange (ASX).
The formula for dividend yield is:
Dividend Yield = (Annual Dividends Per Share ÷ Current Share Price) × 100
For example, if a company pays an annual dividend of $0.50 per share and its current share price is $10, the dividend yield is 5%. This means an investor would receive $5 in dividends for every $100 invested (before tax).
Dividend yield in an Australian context
Australia’s dividend imputation system — also known as franking credits — makes dividend investing particularly attractive for local investors. Franking credits represent the tax already paid by the company on its profits, which are passed on to shareholders and can reduce personal tax liability, potentially increasing the effective yield.
What is a good dividend yield?
There is no universal benchmark for a “good” dividend yield, as it depends on the industry and prevailing interest rates. In general:
- A yield between 3–6% is often considered solid for ASX-listed stocks
- Very high yields (above 8–10%) may indicate that a company’s share price has fallen significantly, which could reflect underlying business difficulties
Dividend yield vs. profit
It is important to note that dividend yield and profit are different concepts. A company may be profitable but choose to reinvest earnings rather than distribute them as dividends. Dividend yield only reflects the value actually returned to shareholders — not the company’s overall financial performance.