Forward Dividend Yield

Publication Date :

29 Apr, 2024

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Table Of Contents

What Is Forward Dividend Yield?

The Forward Dividend Yield is a financial measure used to calculate the projected rate of annual dividends a company is expected to distribute to its shareholders in the future, typically over a period of 12 months. Thus, investors estimate the potential future returns based on a security's indicated dividend.

Also known as indicated dividend, it is a crucial metric that equips investors to gauge the income potential from holding a particular stock. However, it helps predict the expected dividends of companies with stable dividend formats and transparent dividend policies. Hence, it fails to anticipate the dividend yield of rapidly growing young business entities.

What Is Forward Dividend Yield?

The Forward Dividend Yield refers to the anticipated returns on stocks/securities in the upcoming 12 months based on the latest dividend payment/s made by the company under study.
It is computed as * 100.
It is a relevant metric for determining the potential returns from the securities of established firms with a clear dividend policy and stable dividend distribution history.
While it considers the projected dividends for the next year, trailing dividend yield reflects the dividends the company disbursed to the shareholders in the past 12 months.

Forward Dividend Yield Explained

The forward dividend yield is a financial metric used to gauge the anticipated percentage return on a stock's future dividends based on its current market price. Investors commonly employ this metric to evaluate the income potential of an investment and compare it with other securities.

A higher yield could signify a more attractive income stream. A declining yield might suggest an increasing stock price, potentially indicating a sense of optimism in the market. However, investors and analysts should use additional tools and market information to determine the validity of a projected dividend payout.

Analysts incorporate the forward dividend yield and other metrics to assess whether a stock is overvalued or undervalued when compared to its historical dividends. However, an exceptionally high dividend yield could signal potential financial difficulties and a poor strategic framework within a company.

Firms with a consistent history of increasing dividends indicate robust financial health and the possibility of sustained growth. Hence, this tool supports valuation and risk assessment, keeping a company’s possible sustainable growth in view.

A company's dividend policy plays a crucial role in shaping its future. Established companies may adopt a stable dividend policy due to steady profits and long-term growth vision. However, budding and growing companies have volatile dividend payments since they reinvest their earnings into the business for expansion.

Although indicated yield is a valuable tool, investors and shareholders must consider additional factors, such as a company's financial stability, payout ratio, and growth prospects, to make sound investment decisions.

Formula

The indicated yield is a useful tool for income-focused investors, helping them compare different investment avenues. It indicates whether a company’s management is confident and positive about its prospects.

It is determined through the current indicated dividend of a stock. The formula is shown below:

Forward Dividend Yield = * 100

Examples

Shareholders often look at the indicated yields of companies before investing or planning to stay invested. Let us understand the importance of forward dividend yield through the following examples.

Example #1

Let us study SBA Communications Corporation Class A Common Stock (SBAC) listed on NASDAQ.

Source

The stock price of SBAC was $218.11 as of August 22, 2023.

The company announces dividends quarterly, and the number of dividend payments each year is 4.

The most recent dividend was payable on August 23, 2023, i.e., $0.85 per share.

On applying the formula:

Forward Dividend Yield = * 100

Forward Dividend Yield = * 100 = 1.56%
Hence, the company is expected to pay a 1.56% dividend yield in the next 12 months.

Example #2

Suppose Allbright Corp. has a forward dividend yield of 2.16%, while another company, LightKey Corp., has an indicated yield of 4.09%. While both firms are well-established, Allbright Corp. is retaining profits for its new project that would increase its earning potential by 15% in the next five years.

Penny is a shareholder of Allbright Corp., but upon comparing the company's dividend prospects with LightKey Corp., she finds LightKey Corp. more favorable. However, her portfolio manager suggested staying invested in Allbright Corp., considering its future growth potential.

In this way, proper analysis can help existing shareholders and prospective investors make the right decisions regarding their investments.

Limitations

Although the forward dividend yield is a valuable tool, it is essential to go through its drawbacks and use it with other metrics to evaluate investment prospects accurately. By combining it with other valuation and assessment parameters, investors can get a holistic view of a company’s prospects.

Here are some key limitations for analysis.

Dividend Stability Assumption: This metric assumes that dividends will remain consistent, disregarding the potential impact of changing company financials, economic conditions, corporate performance, and managerial decisions.
Misleading Input: By solely focusing on dividends, this method overlooks potential fluctuations in stock price. A high yield is likely due to a declining stock value rather than a substantial dividend payout.
Unsuitable for Growth-oriented Firms: The metric could better assess companies that reinvest profits for growth instead of distributing dividends. These companies may have lower or no dividends but offer substantial growth potential.
Industry Discrepancies: Comparing forward dividend yields across diverse industries can be misleading due to differences in payout practices. Specific industries traditionally offer higher dividends, while others prioritize reinvestment.
Incomplete Insight: The metric provides a limited perspective on a company's financial well-being, disregarding other crucial factors such as earnings growth, debt levels, and overall profitability.

Forward Dividend Yield vs Trailing Dividend Yield

Forward dividend yield and trailing dividend yield are two distinct metrics employed to evaluate the income potential of stocks that offer dividends. Let us discuss their dissimilarities in this section.

Basis	Forward Dividend Yield	Trailing Dividend Yield
Definition	Forward dividend yield estimates a stock's potential returns or projected dividends for the upcoming twelve months based on the current indicated dividend.	It is a financial measure that calculates the previous returns by analyzing the dividends paid by a company over the preceding twelve months.
Reflects	A company's future dividend expectations rely on the most recent dividend distribution.	A company's historical dividend distribution provides an understanding of its recent performance.
Formula	Forward Dividend Yield = * 100	Trailing Dividend Yield = (Trailing 12 Months Dividend / Current Stock Price) * 100
Key Component	The current indicated dividend is the focus area.	The actual dividend payment is considered for evaluation.
Accuracy	It projects estimated figures since it is an expectation based on indicated dividends.	It provides exact figures since it is based on historical dividend payouts.
Suitability	It is apt for gauging a company's returns on stocks with a clear dividend policy and stable dividend distribution.	It is relevant to companies that have unstable or fluctuating dividend distribution patterns.

Frequently Asked Questions (FAQs)

Is a higher forward dividend yield better?

Shareholders are often on the lookout for securities with high dividend yields. However, a very high forward dividend yield may indicate an increased risk security since it may indicate that the company is not retaining profits for further expansion or growth or has no upcoming projects. Hence, shareholders and prospective investors considering stocks should be careful with such investments.

How should an investor objectively interpret forward dividend yield?

The forward dividend yield is a projected figure acquired by annualizing the latest dividend paid by the company. Holding the particular security helps understand the future possibilities of returns. Hence, a shareholder must take it as a reference for comparing different stocks' dividend potential and analyzing an investment's risk and return profile.

What is a good forward dividend yield?

An ideal indicated yield is between 2% and 6% per the records of the dividend-paying companies listed on the Standard & Poor’s (S&P) 500 index. Dividend payments may fluctuate with changes in market conditions, the company's long-term goals, and dividend policies.

Does the frequency of dividend payments affect the forward dividend yield calculation?

The frequency of dividend payments affects the indicated yield calculation since the formula takes the total number of dividend payments released annually into account while calculating the projected figure. Hence, a higher frequency of dividend payments will naturally be reflected in the indicated yield projection.