What is a Forward Dividend Yield?
How Does a Forward Dividend Yield Work?
Forward dividend yields can be calculated in a number of ways, and depending on which way they are calculated, various sources will often list different yields for the exact same security.
For example, let's assume Company XYZ's current share price is $50. Let's also assume the firm has made the following dividend payments over the past year:
March -- $0.50 per share
June -- $0.50 per share
September -- $0.50 per share
December -- $1.00 per share
As you can see, Company XYZ has paid $2.50 per share in total dividends over the past twelve months. So in this example, XYZ sports a trailing Dividend yield of 5% (calculated by taking the $2.50 in actual trailing dividend payments and dividing that figure by a $50 share price).
But it's important to keep in mind that this represents just one way of calculating yields. Some financial sources report yields a bit differently--instead of showing trailing dividend yields, they list forward dividend yields.
Unlike a trailing dividend yield, a forward dividend yield projects dividend payments over the next 12 months, and is best used when these payments can be predicted with reasonable accuracy. The forward dividend yield takes the stock's latest declared dividend payment and annualizes it over the next 12 months.
Returning to our example, Company XYZ's most recent dividend payment was $1.00 per share. Assuming the firm's quarterly dividend payout remains at this new level, the firm will deliver total dividend payments of $4.00 per share in the coming year. Therefore, Company XYZ's forward dividend yield is 8% (calculated by taking the $4.00 in projected future dividend payments and dividing that figure by a $50 share price).
This forward dividend yield of 8% is very different from the trailing dividend yield of 5% shown above. Both are correct, but they are simply calculated in a different manner.
Why Does a Forward Dividend Yield Matter?
When payments vary greatly, the most reasonable calculation involves taking the last 12 months of dividend payouts (trailing twelve months) and dividing that figure by the firm's current share price. This is the trailing dividend yield. But when a company has announced a regular dividend payout for the forthcoming 12-month period, the forward dividend yield more accurately reflects what shareholders can expect to receive.
To make matters even more complex, what counts as a dividend payment may also vary. Some calculations include all components of the payment, including ordinary dividends, short-term capital gains, long-term capital gains, return of capital, and one-time special payments. Meanwhile, other calculations may count certain parts of the distribution, but may exclude others based on their different tax treatment or the fact that they are not considered part of the 'regular' dividend payment.