What is dividend yield?
Dividend yield is the annual dividend paid per share or unit, divided by the current share price, expressed as a percentage. It measures the income return only, it says nothing about whether the share price itself is rising or falling. Because the share price sits in the denominator, yield can rise simply because a price has fallen, with no change to the dividend at all, which is why yield needs to be read alongside price and total return, not on its own.
How dividend yield works
The formula is straightforward:
Dividend yield = (annual dividends per share ÷ current share price) × 100
Yield can be quoted two ways. Trailing yield uses the dividends actually paid over the past 12 months, a known figure. Forward yield uses an estimate of the next 12 months, based on analyst forecasts or the company's own guidance, which is not guaranteed. Most yield figures quoted by brokers and data providers are trailing unless stated otherwise.
For an ETF, the yield reflects the combined distributions of everything the fund holds, weighted by each holding's size in the portfolio, paid out on the ETF's own distribution schedule, typically quarterly for Australian share ETFs.
Example calculation
Company A, a hypothetical ASX-listed company, trades at $40.00 per share and paid $1.60 per share in dividends over the past year.
$1.60 ÷ $40.00 × 100 = 4.0% dividend yield
Now suppose the share price falls to $32.00 over the following months, with no change to the dividend:
$1.60 ÷ $32.00 × 100 = 5.0% dividend yield
The yield rose purely because the price fell. The income an existing holder receives hasn't changed, but a new buyer looking only at the higher headline yield could easily mistake this for an improving investment rather than a warning sign worth investigating.
Dividend yield vs total return
Dividend yield captures income only. Total return captures the complete picture: income plus the change in the share price itself.
| Metric | What it includes | Example |
|---|---|---|
| Dividend yield | Income only | 4.0% |
| Capital growth | Share price change only | -10.0% |
| Total return | Income + capital growth | -6.0% |
In this example, a 4% dividend yield sits alongside a 10% fall in the share price, for a net total return of -6%. The dividend yield alone gave no hint of the overall outcome. Use the Investment Return Calculator to work out total return, including both income and price change, on an investment you hold.
Dividend yield vs yield on cost
Dividend yield uses the current share price as the denominator. Yield on cost instead uses the price you originally paid, so it only ever applies to a holding you already own.
| Metric | Denominator | Best used for |
|---|---|---|
| Dividend yield | Current share price | Comparing buying opportunities today |
| Yield on cost | Your original purchase price | Tracking income growth on an existing holding |
If Company A was bought at $20.00 and now pays $1.60 in annual dividends, the yield on cost is 8.0% ($1.60 ÷ $20.00), even though the current dividend yield (based on today's $40.00 price) is only 4.0%. Yield on cost is a useful way to see how the income from an existing holding has grown over time. It is not a useful figure for deciding whether to buy more shares today, that decision should use the current yield, since new money is invested at today's price, not your original one.
Dividend reinvestment
Many companies and ETFs offer a Dividend Reinvestment Plan (DRP), an option to automatically convert a cash dividend into additional shares or units instead of receiving cash. This keeps the dividend working in the portfolio without a manual buy order. A dividend is taxable income in the year it is paid regardless of whether it is taken as cash or reinvested, so reinvesting doesn't defer the tax, it only changes what happens to the cash. The Dividend Reinvestment Calculator compares taking dividends as cash against reinvesting them over time.
Franking credits, briefly
Many Australian companies pay dividends that are fully or partly "franked". This means the company has already paid company tax (30%, or 25% for eligible base rate entities) on the profit before distributing it, and attaches a franking credit representing that tax already paid. Eligible shareholders use the franking credit to reduce their own income tax, and can receive a refund if the credit exceeds the tax they owe. Franking is specific to Australian company dividends, most international dividends carry no franking credit and may have foreign withholding tax deducted instead. Franking credits are a tax topic in their own right, the ATO is the authoritative source for how they apply to your own tax return.
Common misconceptions
- "A higher yield is always better": a high yield can simply be a falling share price dividing into an unchanged dividend, sometimes a sign the market expects a dividend cut, not a bargain.
- "Dividend yield equals total return": yield ignores capital growth or loss entirely. A high-yield share can still produce a negative total return.
- "A company's dividend is guaranteed": dividends are a board decision, not a contractual obligation, and can be reduced or suspended if company earnings fall.
- "Franking credits make dividends tax-free": they reduce the tax payable on the dividend, they don't eliminate it, and unfranked or partly franked dividends carry a smaller credit or none at all.
- "Yield on cost tells you what to buy today": it only reflects your own historical entry price. A buying decision made today should use today's yield.
Frequently asked questions
What is a good dividend yield?
There is no fixed benchmark. Australian blue-chip shares have often yielded somewhere in the 3–6% range, but a yield needs to be read alongside the share price trend and the company's payout history, not compared to a single "good" number in isolation. A yield well above the market average is worth investigating rather than assuming it's simply a better deal.
Is dividend yield the same as total return?
No. Dividend yield measures only the income paid relative to the share price. Total return adds the change in the share price itself (capital growth or loss) to that income. A share can have an attractive yield while still delivering a poor, or negative, total return if its price falls enough.
Can dividend yield change?
Yes, in two ways. The dividend payment itself can be increased, cut, or suspended by the company. Separately, yield moves whenever the share price moves, even with no change to the dividend, since yield is calculated as dividend divided by current price.
Should investors only focus on high dividend yields?
Focusing only on yield can lead to "yield chasing", buying shares mainly because the yield looks high, without checking why. A high yield is sometimes just a falling share price dividing into an unchanged dividend, which can signal the market expects a dividend cut. Yield is one input among several, not a standalone selection criterion.
How do dividends affect long-term investing?
Dividends can be taken as cash income or reinvested to buy more units, which compounds over time. Reinvested or not, a dividend is taxable income in the year it is paid. Over long periods, dividends have historically made up a meaningful share of total return from Australian shares, alongside capital growth.
Official sources
- Australian Taxation Office - investing in shares, dividends, and franking credits
- ASIC MoneySmart - shares, including dividends and how share investing works
See dividend income in context
Use the Capital Gains Tax Calculator to estimate tax on a future sale, or the ETF Growth Calculator to project how a growing position compounds over time. If you're building a position over time rather than investing a lump sum, the Dollar-Cost Averaging guide explains how regular contributions affect your average entry price.