REFS is
a mine of invaluable information for the private investor.
Selecting shares without its help is like trying to
clap with one hand tied behind your back.
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DY
(Dividend yield)
When consensus
brokers’ estimates are available, the dividend yield is based
on dividend forecasts for the next two reporting periods; these
are apportioned to give a rolling 12 months-ahead view using
the latest share price, and the suffix ‘pr’ is used to indicate
prospective. The 12 months-ahead calculation is illustrated
below. In the absence of brokers’ estimates, reported historic
dividends are used in calculating the yield.
The dividend
yield expresses the annual dividend per share as a percentage
return on investment at the prevailing market price. To calculate
dividend yield, the ‘net’ dividend for the period, whether historic
or forecast, is ‘grossed up’ by the appropriate rate of income
tax, and is then expressed as a percentage of the latest share
price. The dividend for a given period may be subject to adjustment
if the share capital or year end has changed.
There
are several practical reasons for calculating dividend yields
on a ‘gross’ basis, and these include:
- Until
recently, income tax did not apply when dividends were paid
into pension funds
or PEPs, and so for many investors and fund managers, measuring
dividend
yields on a ‘gross’ basis is the only objective way to compare
returns.
- Income
tax rates can fluctuate, in which case any comparison of
dividend yields
between different periods on a ‘net’ basis is unsound.
- Interest
rates on bank deposits, and on government bonds or ‘gilts’,
are uoted
gross, and the yield on equities can only be properly compared
on the same gross basis.
- When
a dividend yield is described as historic, it refers to
the annualised dividend for the last reported period, shown
as a percentage of the latest share price. For a prospective
dividend yield, the annualised dividend forecast for the
current or following period is likewise shown as a percentage
of the latest share price.
In Company REFS, dividend yield shown in the shaded panel is prospective,
whenever forecasts are available, and is calculated, crucially,
on a rolling 12 months-ahead basis.
Calculating
the dividend yield
The calculation
of dividend yield is shown below, and works out in this example
at 3.93%.
Step
1: Calculate net dividend per share
If forecasts
are not available, this is simply the historic dividend for
the last reported period, adjusted when necessary to compensate
for non-standard periods and share capital changes.
If forecasts
are available, net DPS is calculated on a rolling 12 months-ahead
basis by apportioning the forecast DPS for the current and
following reporting periods. The example below illustrates
this, and shows 12 months-ahead DPS measured at 28th February
1997. The current share price is 445p, the next year-end is
30th September 1997, and dividend forecasts are available
for the current year, to September 1997, and the following
year.
Step 2:
Calculate gross dividend per share
For the
purpose of illustration, it is assumed that the standard rate
of income tax applicable to dividends declared net is 20%.
On this basis, it follows that the net dividend per share
is 80% of its gross value. The grossed-up dividend per share
is therefore calculated as follows:
100 NET
DIVIDEND X ---------- = GROSS DIVIDEND
PER SHARE
(100-20) PER SHARE
100
= 14.0P
X ----- = 17.5P
80
Step
3: Calculate dividend yield, as follows:
GROSS DIVIDEND
PER SHARE
-------------------------------
X 100 = DY (%)
LATEST
SHARE PRICE
17.5P
= ------ X 100 = 3.93%
445P
See also
foreign income
dividends for further information.
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