Dividend yield is the simplest useful calculation in investing, and the most frequently misread. It tells you what a company paid out last year relative to what its shares cost today. It does not tell you what you will receive next year, and it is at its most flattering precisely when a business is in trouble.
The calculation
Divide the annual dividend per share by the current share price, then multiply by 100:
Dividend yield (%) = (annual dividend per share ÷ current share price) × 100
A company paying GH₵0.30 per share annually, with shares trading at GH₵5.00:
(0.30 ÷ 5.00) × 100 = 6.0%
That is the whole formula. The difficulty is entirely in choosing the two numbers you put into it.
Which dividend figure?
There are three candidates, and they answer different questions:
| Measure | What it uses | What it tells you |
|---|---|---|
| Trailing yield | Dividends actually paid over the last 12 months | What happened. Factual, but backward-looking |
| Forward yield | The dividend expected over the next 12 months | What you might receive. Useful but an estimate |
| Yield on cost | Current dividend ÷ the price you paid | How your own holding is performing. Irrelevant to a new buyer |
Most published yields are trailing. If a company has just cut its dividend, the trailing yield will look healthy for up to a year after the cut — which is exactly the window in which an unwary buyer gets caught.
Which price?
The current market price, not the price you remember. Because price sits in the denominator, yield rises automatically as a share falls. A yield that has climbed sharply usually means the price dropped, not that the dividend grew.
The yield trap
This is the mistake that costs income investors the most money. Consider two companies both showing a 9% yield:
- Company A has paid a steadily rising dividend for eight years, earns roughly twice what it pays out, and its share price has drifted down with the wider market.
- Company B paid a large dividend last year, has since reported falling profits, pays out more than it earns, and its share price has halved.
Both show 9%. Company A is possibly an opportunity. Company B is advertising a payment it may not be able to repeat. The yield cannot distinguish between them — which is why yield is where the analysis starts, not where it ends.
The three checks that make yield meaningful
1. Payout ratio — can they afford it?
Divide the dividend per share by earnings per share:
Payout ratio (%) = (dividend per share ÷ earnings per share) × 100
A company paying GH₵0.30 while earning GH₵0.75 has a 40% payout ratio: comfortable, with room to keep paying through a weaker year. A company paying GH₵0.30 while earning GH₵0.20 has a 150% payout ratio — it is funding the dividend from reserves or borrowing, which cannot continue indefinitely.
There is no universally correct level. Banks and utilities sustain higher payouts than companies that must constantly reinvest. But a ratio above 100% always demands an explanation.
2. Dividend history — have they done this before?
Pull five years of dividends from the annual reports. You are looking for a pattern:
- Rising steadily — a management team that treats the dividend as a commitment.
- Flat — acceptable, if earnings are also flat.
- Erratic, or a large one-off — the one-off may reflect an asset sale rather than trading performance. Do not annualise it.
- Cut and not restored — treat the current yield with real suspicion.
3. Cash flow — is the profit real?
Dividends are paid in cash, not in accounting profit. Check that operating cash flow comfortably covers the dividend. A company reporting profits but generating little cash is a company whose dividend is living on borrowed time. Our guide to reading financial statements covers where to find this in the accounts.
Dividend yield in the Ghanaian context
Two local factors change how you should read a yield.
Compare against the risk-free alternative. If government treasury bills are paying a substantial return, an equity yield must do more than match them — it has to compensate you for the fact that share prices move and dividends can be cut. When short-term government rates are high, a 7% equity yield is not generous; it may be inadequate. See treasury bills in Ghana, and check the live GSE board for current prices.
Inflation decides whether the income is real. A 10% dividend yield during 20% inflation is a loss of purchasing power, even though the cash arrived. The relevant figure is always the yield after inflation. We cover this in how inflation affects savings and investments.
And liquidity matters for income investors specifically. If you may need to sell, a high-yielding share that barely trades is a trap of a different kind. Check volumes before you buy.
Building an income portfolio
If income is your objective, a reasonable process looks like this:
- Screen for yield to build a shortlist — but treat it as a shortlist only.
- Discard anything with a payout ratio you cannot justify.
- Discard anything whose dividend history shows a cut that was never restored.
- Check that operating cash flow covers the payout.
- Spread across sectors. Banks, telecoms and consumer businesses do not all come under pressure at once.
- Compare the surviving candidates' yields against treasury bills and inflation, not against each other.
Note what this produces: usually a shorter list with lower headline yields than you started with. That is the process working, not failing.
Frequently asked questions
Is a higher dividend yield always better?
No. Yield rises when price falls, so the highest yields on any market frequently belong to the companies in the most difficulty. Check affordability before being attracted by the number.
What is a good dividend yield?
There is no fixed answer, because it depends on prevailing interest rates and inflation. The useful comparison is against the return on short-term government securities: an equity yield should exceed it by enough to pay you for the additional risk.
Do all listed companies pay dividends?
No. Companies reinvesting heavily for growth often pay nothing, and that can be the right decision. A company with no dividend is not a worse investment — it is a different kind of investment.
How often are dividends paid in Ghana?
Practice varies by company; some pay annually after the full-year results, others pay an interim as well. The company's financial calendar in its annual report is the place to check.
In short
Dividend yield is one division. Its value lies entirely in the three checks that follow: can the company afford the payout, has it sustained one before, and is there cash behind the profit. Do those and yield becomes a genuinely useful tool. Skip them and it is a well-lit path toward the worst companies on the board.