Key takeaways
- Income is yield multiplied by market value. That is the whole first step.
- Yield on cost measures what you paid, not what you hold today. Both are useful and they answer different questions.
- Dividends are declared, not owed. A projection assumes a company keeps choosing to pay.
- A very high yield is often the market pricing in a cut rather than a gift.
Yield times value
Hold $100,000 at a 2.5 percent yield and the expected income is $2,500 a year. Multiply, then divide by twelve if you want it monthly.
The arithmetic is trivial. The assumptions underneath it are where the work is.
Yield on cost is a different question
Current yield uses what the holding is worth now. Yield on cost uses what you paid for it.
Buy at $50 with a $2 dividend and your yield on cost is 4 percent forever, even if the share doubles and the current yield falls to 2. Neither number is wrong. Current yield tells you what this money is earning today. Yield on cost tells you how a decision you made years ago has aged.
Projecting growth honestly
Many companies raise their dividend most years, and compounding a growth rate onto the income line is reasonable. It is also the assumption most likely to break.
Dividend growth is a board decision made annually, not a contract. Payments get frozen and cut, usually in the years you were counting on them most. Project growth if you like, then look at the plan again with growth set to zero and see whether it still works.
When a high yield is a warning
Yield is the dividend divided by the price. A falling price raises the yield mechanically, so an unusually high figure often means the market expects the payment to be cut.
Screening for the highest yields reliably surfaces companies in trouble. Treat a number far above its peers as a question rather than an opportunity.
Sources
- All figures are arithmetic on the stated yields rather than projections for any specific security.
- Yield on cost and current yield are standard definitions. This site computes both from the cost basis and market value you enter.
Open the Portfolio tracker. Enter holdings with yields and growth rates. The calendar and projections run on your numbers.
Open in Capital Allocation →