In 30 seconds
- A dividend is the part of its profit a company pays out in cash to its shareholders.
- Dividend yield = annual dividend per share / share price: Coca-Cola yielded 2.9% at the end of 2025 (2.04 / 69.91).
- The payout ratio tells you whether the dividend is sustainable: below 60% is comfortable for a consumer company; above 80% is at risk.
- A very high yield usually comes from a beaten-down share price and signals a cut, as happened to Intel in 2023 and 2024.
Introduction
In his 2022 letter to shareholders, Warren Buffett explained that Berkshire Hathaway finished buying its 400 million shares of Coca-Cola in 1994, for about $1.3 billion. That year it collected $75 million in dividends. In 2022 it collected $704 million, without putting in another dollar. At the $2.04 per share Coca-Cola paid in 2025, the tally climbs to $816 million a year. That's what a growing dividend looks like. And knowing how to measure it keeps you from falling for the one that looks generous and is about to vanish.
Explanation
A dividend is the part of its profit a company hands out in cash to its shareholders. The company makes money and decides what to do with it: reinvest it in the business, buy back shares, pay down debt or pay it out. Whatever it pays out is the dividend.
Think of a rental apartment. The rent you collect every month is your dividend. If the apartment goes up in value one day, that's something else: a capital gain. And if the tenant stops paying, the place is still yours, but it no longer brings in any income. Stocks work the same way: the dividend is the income, the price is what the apartment is worth, and neither one is guaranteed.
How to calculate dividend yield
Divide the annual dividend per share by the share price. If a stock costs $50 and pays $2 a year, it yields 4%. That's what you'd collect each year for every $100 you invest today, as long as the dividend doesn't change.
The second number to check is the payout ratio: dividends per share divided by earnings per share. It tells you whether the company is paying out what it earns, or more than it earns. Whatever it doesn't pay out, it keeps to fund growth.
When you get paid
The date that matters is the ex-dividend date. To collect, you have to own the stock before that day; buy it on the ex-dividend date or later and the dividend goes to the seller. On that day the price usually drops by roughly the amount of the dividend, because that cash is leaving the company. That's why buying right before it to "capture" the dividend gets you nothing for free. With foreign stocks, the company's home country usually withholds tax before the money reaches you; how much depends on where you live and on your broker.
Formula
Dividend yield = Annual dividend per share / Share price
Annual dividend per share = sum of the dividends paid over the last twelve months
Payout ratio = Dividends per share / Earnings per share (EPS)
Retention ratio = 1 − Payout ratio
Example
The table below compares the dividend yield of four consumer and healthcare heavyweights, using Kaplio's data: Coca-Cola, Johnson & Johnson, Procter & Gamble and PepsiCo. Read it as dollars of dividends per year for every $100 you invest today.
Step by step: Coca-Cola in 2025
1. Dividends paid per share in 2025, according to its 10-K: $2.04 (four payments of $0.51).
2. Closing price on December 31, 2025: $69.91.
3. Dividend yield = 2.04 / 69.91 = 2.9%.
4. Payout ratio = $2.04 of dividends / $3.04 of diluted earnings per share = 67%. Coca-Cola paid out two-thirds of what it earned and kept the other third.
5. Growth: it paid $1.84 in 2023 and $1.94 in 2024. That's a little over 5% a year.
Now look at PepsiCo. In 2025 it declared $5.62 of dividends per share and earned $6.00 per share: a payout ratio of 94%. At its December 31, 2025 close of $143.52, PepsiCo yielded 3.9%, more than Coca-Cola. But it was paying out almost everything it earned.
Before you check the table: which of the four do you think pays the biggest dividend relative to its price today? And which one has its dividend best covered by earnings? They don't have to be the same company.
Real-data example
| Company | Ticker | Dividend yield |
|---|---|---|
| The Coca-Cola Company | KO | 2.5% |
| Johnson & Johnson | JNJ | 2.1% |
| The Procter & Gamble Company | PG | 3.0% |
| PepsiCo, Inc. | PEP | 4.6% |
How to read it
How to read it
Dividend yield only tells you how much you collect. Whether the dividend can last is the payout ratio's job. These are the thresholds used by the sector guide on Kaplio's stock pages:
| Sector | Comfortable payout | Watch | At risk |
|---|---|---|---|
| Consumer, industrials, healthcare | below 60% | 60-80% | above 80% |
| Regulated utilities | 60-80% | 80-90% | above 90% |
A utility can live with a high payout because its revenue is stable and regulated. A consumer company paying out 90% has little room to spare if earnings slip for a year. For banks, a dividend yield above 8% is usually a symptom of trouble, not generosity. Benjamin Graham wanted the defensive investor to own companies that had paid dividends without interruption for at least twenty years: consistency is worth more than any single year's number.
Pitfalls and limitations
1. The yield rises when the price sinks. If the stock falls by half and the dividend doesn't change, the yield doubles. A figure of 8% or 10% usually means the market expects a cut.
2. One year's earnings can fool the payout ratio. Johnson & Johnson had a payout ratio of 85% in 2024 ($4.91 of dividends against $5.79 of earnings per share) and 47% in 2025 ($5.14 against $11.03). The dividend didn't change overnight; earnings did. Look at several years.
3. Paying with debt. Dividends are paid with cash, not accounting profit. Compare them with free cash flow: if it doesn't cover them, the company is borrowing to pay you.
4. Yield on cost. The $816 million Berkshire collects from Coca-Cola is more than 60% of what it paid in 1994. It makes a great story, but it won't help you decide anything today: what matters is what your money earns at the current price.
Case in point: Intel, the dividend that disappeared
Intel paid $1.46 per share in 2022, on earnings of $1.94: a payout ratio of 75%. At the end of 2022, at $26.43, it yielded 5.5%, well above other tech companies. In 2023 it cut the dividend to $0.74, and even then it was more than its earnings per share of $0.40: a payout ratio of 185%. In 2024 it lost $4.38 per share and suspended the dividend; in 2025 it paid nothing. The high yield was the warning.
Practice on Kaplio
Frequently asked questions
What does a 4% dividend yield mean?
It means that for every $100 you invest at today's price, you'd collect $4 a year in dividends, as long as the payout stays the same. A $50 stock paying $2 a year yields 4%. The yield says nothing about whether the dividend is safe, so check the payout ratio and free cash flow too.
What does a 10% dividend yield mean?
On paper, $10 a year for every $100 invested. In practice, a yield that high usually means the share price has collapsed and the market expects a cut. Intel yielded 5.5% at the end of 2022 with a payout ratio of 75%; two years later it had suspended the dividend. Treat double-digit yields as a warning.
Are dividends free money?
No. On the ex-dividend date the share price usually drops by roughly the amount of the dividend, because that cash is leaving the company. You end up with the same value split between cash and stock, and possibly a tax bill. The real gain comes from a business that earns more over time and keeps raising its dividend.
Is it a good idea to buy dividend stocks?
It can be, if you pick companies that earn more than they pay out and raise the dividend over time, as Coca-Cola did from $1.84 in 2023 to $2.04 in 2025. Chasing the highest yield isn't a strategy: it often hides a beaten-down price and a cut on the way. Dividends are one part of your return; the price is the other.