Dividends: yield, yield on cost and what you will collect

What dividend yield is and how to calculate it

Dividend yield answers a simple question: if I buy today, how much cash will the company hand back each year for every euro I invest? You divide the dividends per share paid over a year by the current share price.

An example: a share trades at €40 and has paid €1.60 per share over the last twelve months. Its dividend yield is 1.60 ÷ 40 = 4%. If the price drops to €32 tomorrow and the dividend does not change, the yield rises to 5%, although the company pays not a cent more.

You will see two versions. Trailing yield adds up what was paid over the last twelve months; forward yield uses what is expected for the next twelve. If the company pays quarterly, add the four payments: multiplying one quarterly payment by four goes wrong as soon as there is a special dividend or a raise mid-year.

What yield on cost means (and why it is no use for comparing)

Yield on cost uses the same formula with your average purchase price instead of today's price: annual dividend per share ÷ what you paid per share. It measures how much the money you put in back then is paying you today.

If a company raises its dividend year after year, your yield on cost grows while you do nothing. In the table's example you bought at €20 when it paid €0.80 (4%). Ten years later it pays €1.60 and trades at €40: a buyer today gets 4%, but you get 8% on what you paid.

It is an encouraging figure, but it should not drive decisions. That 8% does not mean the share yields more than another: if you sold today you would get €40 a share and could invest it in something paying 4% or more. To compare investments, use today's dividend yield and, better still, total return.

Gross and net dividends: how much tax takes

Tax depends on where you live, so check your own country's rules. The mechanism is similar almost everywhere, and here we use Spain, MyPortfolio's home market, as the worked example. In Spain dividends are taxed as savings income at 19% up to €6,000, 21% up to €50,000, 23% up to €200,000, 27% up to €300,000 and 30% above, and the bank or broker withholds 19% on each payment as an advance on the annual return.

Foreign shares get taxed twice at first. A US company withholds 15% from investors in treaty countries who have filed a W-8BEN form with their broker: of a €1,000 dividend, €850 is left. A Spanish broker then withholds 19% of those €850 (€161.50), so €688.50 lands in the account.

The double taxation is fixed in the annual return with a foreign tax credit. In Spain you declare the €1,000 gross, the tax at 19% would be €190 and you deduct what was paid abroad, capped at the rate in the tax treaty between both countries (15% for US dividends) and at what Spain would charge on that income. You owe €40 against €161.50 already withheld, so €121.50 comes back and you keep €810, the same as with a Spanish company.

Whatever the source country withholds above the treaty rate cannot be credited at home: you have to reclaim it from that country, which is usually slow. Most countries with an income tax treaty follow this logic, but the forms, rates and limits are local, so check with your tax authority or an adviser.

Accumulating or distributing funds: which suits you?

A distributing fund or ETF pays out in cash the dividends it collects from its shares; an accumulating one reinvests them inside and pays you nothing, so its price grows instead of the money reaching you. The shares inside are the same; what changes is when you pay tax.

In most countries each payout from a distributing fund is taxed like a dividend, whether you need the money or not, while an accumulating fund is taxed when you sell. Some countries tax accumulating funds every year anyway (Germany does it with a flat advance charge), and in Spain mutual funds, unlike ETFs, can be switched without tax.

So if you are building wealth and do not need the income, accumulating is usually cheaper in tax. Distributing makes sense when you want that money every year to spend. A tip when you count your dividends: an accumulating fund never shows up as a payer, although the companies inside it do pay.

How to work out how much you will collect in dividends this year

Doing the sums for a real portfolio takes more than a formula: each company pays on different dates, in its own currency and with its own withholding. These are the steps.

It is what the “Dividends” tab of each portfolio in MyPortfolio does with your holdings: what you collected this year, what is coming over the next 12 months month by month (keeping what companies have announced apart from what is estimated from last year's payments) and your dividend yield on today's price and on what you paid. Amounts are gross unless you enter the withholding your broker applies to a company; for residents in Spain they are net of the usual Spanish withholding, which you can correct company by company.

1. 1

   List your holdings and your shares

   Write down how many shares or units you own of each. Leave accumulating funds aside: they will not pay you anything.

2. 2

   Find each one's dividend per share

   Use what the company has already announced and, for the rest of the year, what it paid last year on the same dates. It is a cautious estimate: it assumes no raises.

3. 3

   Multiply and convert to your currency

   Shares times dividend per share, payment by payment, and convert payments in dollars, pounds or Swiss francs at today's exchange rate.

4. 4

   Take off the withholding

   The source country's withholding on foreign shares and whatever your own broker withholds. That is what really reaches your account.

5. 5

   Keep the announced apart from the estimated

   Announced payments are nearly certain; estimates can change. If the total depends heavily on one company, any cut will show.

Why dividend yield on its own is misleading

A dividend is not money out of thin air. On the day the share stops carrying the right to the payment (the ex-dividend date), its price falls by roughly the amount paid: the company takes that cash out of its till and gives it to you. Your wealth does not grow because you get paid; it grows if the company earns more than it pays out.

That is why a very high dividend yield is more often a warning than a bargain: the price has often fallen because the market expects the dividend to be cut. A 6% dividend with a 10% fall in the price is a 4% loss for the year.

Dividends matter, but they are only part of it. According to Bloomberg data compiled by First Trust, they made up 36.5% of the S&P 500's total return between 1927 and 2024; the rest came from rising prices. The figure to judge your portfolio by is total return, dividends and price together, measured as a TWR so your contributions do not distort it.

How much money do you need to live off dividends?

The sum is simple: the net income you want each year, grossed up for tax, divided by the dividend yield. For €2,000 a month after tax (€24,000 a year) with a 20% tax rate you need €30,000 gross. With a 3.5% dividend yield that is about €857,000 invested; with 5%, €600,000; with 3%, a million.

Now the risks. Dividends are not guaranteed: in 2020, according to the Janus Henderson Global Dividend Index, one company in eight cancelled its dividend and one in five cut it, and dividends worldwide fell 12.2%. If you live on them, a year like that is a pay cut.

Inflation also eats an income that does not grow: with 2% inflation (the European Central Bank's target), €24,000 today buys about €19,700 worth in ten years. And chasing a higher yield to need less capital tends to push you into few companies and few sectors, exactly where a cut hurts most.

Living off dividends does not take less money than living off selling units bit by bit either: what a portfolio pays you is its total return, whether it comes out as a dividend or as a sale. The difference is in tax and in your head. In many countries selling is only taxed on the gain, not on everything you take out; with dividends you never have to decide when to sell. The sensible thing is to run the numbers with your own figures, with a margin, and review them every year.

Frequently asked questions