Dividend yield, explained
Dividend yield is the income a stock pays relative to its price — but a yield that looks too good is often a warning. Here's how to read it.
What it measures
Dividend yield is the annual dividend a company pays, expressed as a percentage of its share price. It tells you the income return you'd get from owning the shares, before any change in the price itself.
The formula
Worked example
A share costs £20 and pays a £1 annual dividend:
You'd earn 5% a year in income at that price, on top of any price movement.
What's a good yield?
A yield of 2–5% is common for established, dividend-paying companies. But higher is not automatically better — which leads to the most important point.
The yield trap: because yield rises when the price falls, an unusually high yield (say 9–10%) is often a warning, not a gift. It can mean the market expects the dividend to be cut. Always check the dividend is actually covered by free cash flow before chasing a juicy yield.
A sustainable, growing dividend backed by real cash is a sign of a healthy business — a high yield the market doesn't believe is the opposite.
Put this into practice — open the screener →