Definition of Future Dividend Yield
The future dividend yield is used to estimate a company’s future annual earnings amounts and is represented as a percentage of the current stock price.
How to Calculate Future Dividend Yield?
To calculate the future dividend yield, you must estimate the most recent earnings and divide them by the stock price. Then multiply the result by 100 to get the percentage. For example, if the last quarterly earnings of a company were $2 per share and the current stock price is $100, then the future dividend yield for Company X is 8%.
How Does Future Dividend Yield Work?
The future dividend yield is best used for companies whose dividend payments can be accurately predicted. Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan, states that the future dividend yield should be used after researching the company’s dividend policy and stability. Milan mentions that companies that pay stable dividends and announce their dividend policy are examples of companies with a reliable future dividend yield. Companies like Coca-Cola have consistently paid and increased dividends for at least 25 years.
Limitations of Future Dividend Yield
However, the future dividend yield has its limitations and should not be used as the sole basis for making an investment decision. In the case of companies that issue unstable dividends, the past dividend yield may provide a more accurate legitimacy. The past dividend yield calculates all actual dividends per share paid over the past twelve months, not just the most recent earnings. For example, if Company X issued the following dividends last year: $0.50 in March, $1.00 in June, $0.50 in September, and $2.00 in December, the total dividends paid by the company last year would be $4 per share. After calculating these figures, the past dividend yield would be 4%. Compared to the future dividend yield that only considered the most recent earnings ($2 per share), using the past dividend yield to account for all of last year’s earnings provides a more accurate projection.
Difference Between Future Dividend Yield and Past Dividend Yield
The future dividend yield uses the latest earnings per share to predict future earnings, while the past dividend yield uses the actual earnings per share paid over the last twelve months to forecast future earnings. The future dividend yield is suitable for companies that issue stable dividends and announce their dividend policy, whereas the past dividend yield is appropriate for companies that have widely varying dividends.
What Does This Mean for Individual Investors?
You are likely to rely on the future dividend yield when your core strategy revolves around dividends. Milan recommends that investors consider other factors such as “financial strength, debt coverage, future price-to-earnings ratio, technical indicators, other fundamental indicators, and momentum indicators” when evaluating a company’s value. Similar to regular dividend yield, the future dividend yield does not always indicate a worthy investment. A higher yield may indicate a lower stock price due to financial difficulties, such as bankruptcy. Remember that a higher yield also means that a higher portion of the company’s revenue is not being reinvested in company growth.
Source: https://www.thebalancemoney.com/forward-dividend-yield-5198332
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