If you own an income stock you want to know what annual return you are making. Enter the dividend yield.
This is a firm’s annual dividend as a percentage of the current share price. So if the annual dividend is 10p per share and the share price is £1, the yield is 10% ((10p/£1) x 100%). This can be compared to the income return on other investments such as fixed income securities and even cash accounts. Be careful though – sometimes a high yield is a function of a low share price which suggests investors may be nervous about the sustainability of the dividend. This situation is known as a dividend trap.