What is dividend yield?

Dividend yield tells you how much cash a stock pays you each year relative to what it costs. Take the annual dividend per share and divide by the current price. A company paying $2 a year on a $50 share yields 4 percent. Put $10,000 in and, if nothing changes, you collect $400 a year.

It is a way to compare income across stocks and against other things that pay you, like savings accounts and bonds. The S&P 500 as a whole yields under 2 percent these days; utilities and consumer staples often yield 3 to 4; real estate trusts more.

The trap is that yield moves inversely with price. If a stock falls from $50 to $25 and the dividend stays $2, the yield jumps to 8 percent. That looks tempting, but the price fell for a reason, and the reason is often that investors expect the dividend to be cut. When it is, the yield collapses along with the price. Extremely high yields are more often a warning than an opportunity.

A more useful measure for long-term holders is the payout ratio, the share of profits paid as dividends. Below about 60 percent leaves room to keep paying through a bad year; above 100 percent means the company is paying more than it earns, which cannot last.