What it means
The calculation is straightforward: take the expected annual dividend per share and divide it by the share price today. Most data providers build the forward figure by taking the most recently declared dividend and annualising it, so a newly raised quarterly payment of $0.45 becomes an expected $1.80 for the year.
The contrast with trailing dividend yield matters. Trailing yield uses dividends actually paid over the past twelve months, which is reliable but backward-looking, while forward yield uses what is expected next, which is more relevant but can be wrong.
When a company has just cut or raised its dividend, the two figures can differ sharply, and quoting the wrong one is a common source of confusion. Income investors use forward yield to compare shares against each other and against bonds and deposits.
It also feeds directly into portfolio planning, because multiplying the expected dividend per share by the number of shares held gives a rough expected income figure for the year. A very high forward yield deserves suspicion rather than enthusiasm.
Yield rises when the price falls, so an unusually high number often signals that the market expects the dividend to be cut, a situation sometimes called a yield trap. Checking whether earnings and free cash flow comfortably cover the payment is the sensible next step.
Two practical wrinkles are worth noting. Special dividends can inflate an annualised figure that will not repeat, and companies that pay a variable or progressive dividend make simple annualisation unreliable, which is why analysts often use a forecast dividend instead of a mechanical multiplication.
In practice
Real-world examples.
Example
A retired investor comparing two utilities finds one on a 3.0% forward yield and the other on 5.8%. Digging into the second, he sees the dividend exceeds free cash flow, concludes a cut is likely and buys the lower-yielding share instead.
Example
A pension trustee builds an income forecast for the coming year by multiplying each holding's expected dividend per share by the number of shares held. The forward yield across the whole portfolio comes out at 3.4%, which she compares with the scheme's required income.
Example
A listed engineering group announces a 15% dividend increase alongside its results. Its forward yield jumps above the trailing figure overnight, and the investor relations team makes a point of quoting both numbers so analysts are not caught out.
Formula
Calculation
Forward dividend yield = (Expected dividend per share over the next 12 months / Current share price) x 100.
A listed distribution company trades at $60.00 a share. It has just declared a quarterly dividend of $0.45, raised from $0.40, and has said it intends to hold the new level for the coming year.
The expected annual dividend per share is 0.45 x 4 = $1.80, so the forward dividend yield is (1.80 / 60.00) x 100 = 3.0%.
The trailing yield tells a different story. Over the past twelve months the company actually paid 0.40 + 0.40 + 0.40 + 0.45 = $1.65, so the trailing yield is (1.65 / 60.00) x 100 = 2.75%.
An investor holding 5,000 shares can translate the forward yield into cash: 5,000 x 1.80 = $9,000 of expected dividend income over the next year, assuming the payment is held at the declared level.Case study
Seen in the real world.
Kestrel Coastal Utilities is a fictional company used for this illustrative example. Its shares had fallen from $40 to $24 over a difficult year, and because the board had not yet changed the dividend of $2.00 a share, screening tools showed a forward dividend yield of 8.3%.
A private investor spotted the number and saw an income opportunity. A more careful reader would have noticed that expected earnings per share had fallen to $1.40, so the dividend was no longer covered, and that the company was funding part of the payment from borrowings while facing a heavy capital programme.
Three months later the fictional board halved the dividend to $1.00 a share, and the forward yield on the then price collapsed. In this illustrative story, the lesson was that forward dividend yield is a starting question rather than an answer, and that dividend cover and cash flow decide whether the yield is real.
Watch out
Common mistakes.
- Treating the forward dividend yield as a guaranteed return, when the company can reduce or cancel the dividend at any time without breaching any obligation.
- Chasing the highest yield on a screen, which frequently means buying shares whose prices have fallen because the market expects a cut.
- Comparing one company's forward yield with another company's trailing yield, which quietly compares expectation against history.
Questions
People also ask.
How is forward yield different from trailing yield?
Forward yield uses expected dividends for the next twelve months, while trailing yield uses dividends actually paid over the last twelve.
Does the yield change when the share price moves?
Yes, and immediately, because the dividend is the numerator and the price is the denominator, so a falling price raises the yield with no change in the payment.
What is a safe level of dividend cover?
Many income investors look for earnings or free cash flow covering the dividend at least one and a half to two times, though the comfortable level varies a great deal by industry.
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