Buying a stock that pays dividends delivers a financial return even before you sell your shares. If you have 500 shares and the stock pays a $1-per-share dividend a quarter, that's $2,000 a year in pre-tax investment income. When shopping for dividend stocks, one measure is the yield: the size of the dividend divided by the stock price. Forward and trailing dividend yields are two ways to measure and compare yields.
Trailing yield analysis measures dividend yields the obvious way -- looking at a stock's average dividends over the past year. If a $120 stock pays $1.20 in two quarters and $.60 in two quarters, the year's total dividend is $3.60. Divide the per-share price into the dividend and you get the yield, which in this case is 3 percent. Measuring trailing yields for different stocks lets you compare dividend performance regardless of the price per share.
Forward dividend yield takes the opposite approach, figuring how much of a dividend you could earn in the future. If the company has announced its planned dividends for the year, that makes it easy. If not, take the company's final dividend from last year and assume that rate continues. If the fourth-quarter dividend was $1.20, you can project that the next four quarters generate a total $4.80, a 4 percent yield on a $120 stock.
There's no guesswork about trailing yields: The dividends are already out so you know the yield. Forward dividend yields based on last year's dividends can be close to a guess: The Seeking Alpha website found that if you invest in NASDAQ's top 10 dividend stocks, for example, the margin of error was 7 percent.
When you research investments, check how the analyst defines dividends. Some online resources include special one-time payments and return of capital to calculate the "true" dividend. Always look at the big financial picture, not just the dividends: High yields don't mean much if the company itself isn't performing, or the stock is way overpriced. The "Wall Street Journal's" Market Watch website recommends you look at dividends as a nice extra for investing in quality stocks, not an end in itself.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.