Historical versus forecast dividend yield

Dividends are typically declared twice a year in the UK, when the company announces its interim and final results. The two dividend payments declared add up to the total dividend for the year.

The historical yield is calculated by dividing last year’s declared dividend by the current share price.

The forecast yield, in contrast, is based on analysts’ expectations of the total dividend payment for the current year. There’s thus an element of guesswork involved, whereas the historical yield is fact.

Which should you give more weight to? It depends on the circumstances.

If you’re evaluating a blue chip FTSE 100 share for your HYP portfolio, it’s probably safe to base your decisions on the forecast yield, since analysts’ dividend predictions about such huge, well-monitored companies are usually pretty accurate. Since it’s the forecast yield that reflects the dividend you’ll be entitled to receive on buying (unless you’re picking up the shares shortly after the company’s final results, and thus in time for the second dividend payment), it will usually make most sense to consider forecast yield the priority, although you should check both.

If you’re considering investing in a smaller, riskier share, you should treat the forecast yield with a greater degree of scepticism. It might well be entirely accurate, particularly if the company has a good record of keeping analysts informed about its dividend intentions, but as a generalisation smaller companies are less scrupulous about dividend payments than the big blue chips, who have pension funds and institutional investors breathing down their neck that rely on dividends to pay pensioners and investors.

Big companies usually increase their dividends by between 2-10% a year, so you wouldn’t expect the forecast and historical yield to vary enormously. If it does, check that there weren’t special circumstances that led to a particularly big dividend payment in the past or the expectation of one in the future (for instance, a disposal of an asset and a return of cash to shareholders via a one-off special dividend).

Another possibility is that analysts expect the dividend to be cut, which would result in a smaller predicted dividend and thus a forecast yield smaller than the historical yield. Obviously this wouldn’t show up if you looked at the historical yield alone, which is why checking both, as well as the dividend cover, is good practice, and very easy with all the resources available today.