Dividend yield calculator — methodology

The four yields

trailing yield  = dividends paid over the last 12 months  ÷ today's price
forward yield   = dividends expected over the next 12 months ÷ today's price
yield on cost   = dividends paid over the last 12 months  ÷ what you paid
earnings yield  = earnings per share                      ÷ today's price

All four are quoted somewhere as “the yield”, and they are facts about different things: what happened, what somebody expects, how a holding has done, and what the company earned. Everything per share is in pence, because UK equities are quoted in pence and because a `MoneyInput` would round a 7.7p dividend entered as £0.077 to £0.08 — a 4% error on the numerator of every one of them.

The earnings yield is the ceiling. A dividend yield above it is a company distributing more than it earns, and the two divided into each other are exactly the payout ratio. That is not a rule about prudence; it is arithmetic about where the money is coming from.

Every one of these divides by a price, and a price of zero is reachable by clearing a box. The page reports no yield at all in that case rather than 0.00%, because 0/0 is not zero and a printed zero is a claim nobody made.

Cover, and the column a falling price cannot move

cover        = earnings per share ÷ dividend per share
payout ratio = dividend per share ÷ earnings per share    (the same thing, inverted)

dividend yield ÷ earnings yield = payout ratio

Both are shown because both are quoted, and a reader who has met one and not the other should not have to convert in their head. The forward row holds earnings still: if the expected dividend is higher than the one already paid, cover falls unless the company earns more — which is a question this page cannot answer and does not pretend to.

Earnings per share may be negative, and the field accepts one. A company can lose money and keep paying, which is the loudest thing a high yield can be hiding. In that case neither cover nor the payout ratio is printed: a negative cover is not a small cover, and a payout ratio against a loss is not a percentage of anything, so the page says so in words instead.

Why a high yield is usually a fallen price

The sensitivity table holds the dividend fixed and moves the price. Nothing about the company changes down it — and the yield does, because the yield’s denominator is the price. A share that halves doubles its yield with no action by anyone.

The cover column is identical on every row of that table, and that is the point rather than a rendering artefact. Cover is earnings over the dividend and contains no price, so the one figure that says whether the dividend is affordable is the one figure a falling price cannot flatter. A screen sorted by yield is therefore substantially a list of shares that have fallen, and the market usually had a reason: sometimes the reason is wrong and the share is cheap, sometimes it is right and the dividend is about to be cut. The yield alone cannot distinguish them, and neither can this page — what it can do is stop the yield from being read as though it could.

The yield after tax, and why it is a marginal rate

marginal rate   = income tax(other income, dividends + £100)
                  − income tax(other income, dividends)      ÷ £100

yield after tax = yield × (1 − marginal rate)

A yield is a rate on the next pound invested, so the tax figure that belongs beside it is the tax on the next pound received. An average rate across a whole dividend is lower whenever an allowance covered part of it, and using it to compare two shares would overstate what both are worth. The two answer different questions and both are right for theirs; the dividend tax calculator computes the average, and this page computes the margin.

The rate is measured against the engine on the dividend field, never read off Breakdown.marginalRate. That field is a forward difference on earned income — the engine says so — so on a page whose entire subject is a dividend yield it would report what the next pound of salary costs. The two differ whenever the dividend schedule and the income tax schedule do, which is nearly always.

The consequence is that the same share has different after-tax yields for two readers. On this calculator’s own figures, a reader who has already used the £500 dividend allowance on £60,000 of other income keeps 5.14% of a 8.00% yield, and a reader who has not used it keeps 8.00% — the gross figure — because their next pound of dividend income is taxed at 0.00%. Identical share, identical price, identical dividend.

Rates and allowances

Thresholds are taxable income, after allowances. Dividend rates are UK-wide and are not devolved; Scottish rates apply to a reader’s other income only, and that income still decides which dividend band the next pound falls in — which is the part most often got wrong.

Sources

• gov.uk — Tax on dividendsThe dividend allowance, the dividend rates, and that dividends are treated as the top slice of income — which is why the rate on the next pound depends on everything else the reader receives.
• gov.uk — Income tax rates and allowances: current and pastThe personal allowance, its taper, and the band thresholds the dividends are stacked against.
• gov.scot — Scottish income tax rates and bandsScottish rates apply to a reader’s other income, never to the dividends — but that other income still decides which dividend band the next pound lands in.
• gov.uk — Individual Savings Accounts (ISAs)That dividends on shares held inside an ISA are not taxable, which is the one mechanism that makes an after-tax yield equal to a gross one.

Where this page stops, and what stops it

• It reports no amount of dividend income, anywhere. There is no field for a holding size and no output in pounds. A yield is a ratio and needs neither, and the income question belongs to the dividend calculator, which also owns the payment calendar, dividend growth and reinvestment. Two thin near-duplicates of one subject compete for the same links instead of ranking twice.
• It shows no band-by-band tax working. That is the dividend tax calculator. What appears here is a single measured rate, turned back into a yield.
• It cannot tell you whether the dividend will be paid. Cover describes a period that has finished, the forward dividend is somebody’s estimate, and a board can cut, suspend or cancel at any time.
• Earnings are not cash. Cover on free cash flow is the harder test and needs a cash flow statement and a capital expenditure figure that this page does not ask for. Debt is not modelled at all.
• The tax is one wrapper and one country. A UK dividend to a UK resident, held outside an ISA and outside a pension, with no withholding tax and no foreign dividend rules. Pension contributions extend the basic-rate band, which is one of the main ways a higher-rate taxpayer reduces a dividend bill, and none of that is modelled.
• A yield is not a return. Nothing here has a view on the share price, and capital gains tax on a disposal is not modelled — the capital gains tax on shares calculator is where that belongs.