The dividend yield is the return on a stock purchase in the form of a dividend as a percentage of the price of the stock. That is, the dividend yield is defined as the yearly dividend of the asset divided by its spot purchase price, multiplied by 100. For example, a stock with a dividend of 2 dollars that sells for 50 dollars is said to have a dividend yield of 4.

Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield is considered to be evidence that a stock is underpriced, whereas a low dividend yield is considered evidence that the stock is overpriced.

The term fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.

The dividend yield of the Dow Jones average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the stock market. Historically, the Dow Jones dividend yield has flucutated between 3.2 (during market highs, for example in 1929) and around 8.0 (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it reached over 15.

With the recent decrease in the importance of dividends, the Dow Jones dividend yield has, since the mid 1990s, fallen well below its historical low-water mark of 3.2 and reached as low as 1.4 during the stock market peak of 2000.

The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield is considered by some bearish investors as indicative that the market is still overvalued.

See also