A dividend yield is a ratio that represents how much a company pays in annual dividends relative to its share price.

A dividend yield is represented as a percentage, and is easily calculated. Simply divide the annual dividends paid per year (dollar value) by the per share price of the stock. Here’s the equation in simple terms:

Annual Dividends Per Share / Price Per Share = Dividend Yield

A company with a higher dividend yield means they pay out more of their profits to shareholders, but it also means that company may be allocated less of their free capital towards investment, research, and other growth areas.

Investors who are seeking to gain equity exposure in their portfolio (for growth) but also desire income from their investments may tend to favor companies with higher dividend yields.

Since companies can change how much they pay out in dividends, yields can change regularly.