CFA Level II Exam · Market-Based Valuation: Price and Enterprise Value Multiples

Dividend Yield and Dividend-Based Valuation Multiples

Updated 7 October 2026 · Fact-checked

Dividend yield is dividends per share divided by price. Trailing yield uses the last four quarters of dividends; forward yield uses expected dividends. Yield equals payout ratio divided by P/E. Under Gordon growth, yield equals required return minus growth (using next year's dividend). Use it only as a limited valuation indicator.

Understand Dividend Yield and Dividend-Based Valuation Multiples

Dividend yield is the cash dividend per share divided by the share price. It tells you the part of your return that arrives as cash. The rest of your return comes from price change.

There are two versions. Trailing dividend yield uses the dividends paid over the last four quarters (D0, often annualised from recent payments) divided by the current price. Forward dividend yield uses the dividend expected over the next 12 months (D1) divided by the current price. When dividends grow, forward yield is higher than trailing yield. Read the vignette carefully to see which one it asks for.

Yield links directly to two other measures. Since P/E = P ÷ E and payout ratio = D ÷ E, dividend yield = D ÷ P = payout ratio ÷ P/E. A high yield can come from a high payout, a low P/E, or both. A low P/E may signal cheapness, or it may signal that the market expects poor growth or sees risk.

Total return has two parts: dividend yield plus price appreciation. Expected return over a year is roughly D1 ÷ P0 + (P1 − P0) ÷ P0. Under the Gordon growth model, P0 = D1 ÷ (r − g). Rearranged, D1 ÷ P0 = r − g. So forward yield equals required return minus constant growth. If growth is constant, price appreciation equals g, and total return equals r.

Dividend yield is a limited valuation indicator. It ignores growth, ignores retained earnings that fund future dividends, and is distorted by buybacks, which return cash without being counted as dividends. Dividend policy can also change. Compare yields only among firms with similar payout policy, growth and risk. Do not treat a high yield as proof of undervaluation: it may signal that a dividend cut is coming.

Key formulas to remember

Trailing dividend yield: Trailing yield = D0 ÷ P0; D0 is dividends over the previous four quarters. P0 is the current price.
Forward dividend yield: Forward yield = D1 ÷ P0; D1 is expected dividends over the next 12 months. Equals D0 × (1 + g) when dividends grow at g.
Yield, payout and P/E: D ÷ P = (D ÷ E) ÷ (P ÷ E) = payout ratio ÷ P/E; Use the same period for D, E and P/E (trailing with trailing, forward with forward).
Dividend payout ratio: Payout = D ÷ E = 1 − retention rate; Retention rate b = 1 − payout.
Gordon growth value: P0 = D1 ÷ (r − g), for r > g; Requires constant growth forever and r greater than g.
Yield under Gordon growth: D1 ÷ P0 = r − g, so r = D1 ÷ P0 + g; Implied required return is forward yield plus growth.
Total return: Total return = dividend yield + capital gain yield; Capital gain yield = (P1 − P0) ÷ P0.

How to solve Dividend Yield and Dividend-Based Valuation Multiples questions

Use this sequence for any dividend yield question in an item set.

1Find the price and the dividend data in the vignette or exhibit. Note whether the dividend is D0 (past) or D1 (expected).
2Decide which yield is asked: trailing (D0 ÷ P0) or forward (D1 ÷ P0). If only D0 and g are given, compute D1 = D0 × (1 + g).
3If the question gives P/E and payout, use yield = payout ÷ P/E. Check both use the same earnings basis (trailing or forward).
4If the question involves required return or growth, apply Gordon growth: forward yield = r − g, or P0 = D1 ÷ (r − g).
5For total return, add capital gain yield to dividend yield. Under constant growth, assume the price grows at g.
6Interpret the answer. Ask whether yield is high because of high payout, low P/E or perceived risk, and whether buybacks or a likely dividend cut change the story.
7Check units and sign. Express yield as a percentage and confirm r > g if you used Gordon growth.

Quickest way: Yield identity shortcut

When to use it: Use when the vignette gives any two of yield, payout and P/E and asks for the third, or gives r and g and asks for yield.

Write D/P = payout ÷ P/E on your scratch pad.
Plug in the two known values and solve for the third.
For Gordon growth, write forward yield = r − g and solve for the missing term.
Before choosing an answer, check whether the question wants trailing or forward and adjust by (1 + g) if needed.

Common mistakes in Dividend Yield and Dividend-Based Valuation Multiples

Using D0 in the Gordon growth formula instead of D1.
The vignette often gives the last dividend, and candidates plug it straight in.
Fix: Always check which dividend you hold. If it is D0, multiply by (1 + g) before dividing by (r − g).
Mixing trailing P/E with forward payout (or the reverse) when using yield = payout ÷ P/E.
Exhibits show several P/E and payout figures side by side.
Fix: Match the basis. Trailing payout with trailing P/E gives trailing yield; forward with forward gives forward yield.
Treating a high dividend yield as proof a stock is cheap.
A high yield looks attractive, and the formula has price in the denominator.
Fix: Ask why the price is low or the payout high. Consider growth, risk and dividend sustainability before concluding anything.
Ignoring share repurchases when comparing firms' cash returns.
Dividend yield only counts cash dividends.
Fix: Note that a firm returning cash by buybacks can show a low yield while returning as much to shareholders. Compare on total payout where the question allows.
Forgetting that yield equals r − g only under constant growth.
The relationship is memorised as a general rule.
Fix: State the condition: constant dividend growth forever and r > g. For multistage cases, do not apply it directly.
Confusing payout ratio with retention rate.
Both are shown as percentages of earnings.
Fix: Payout = D ÷ E. Retention = 1 − payout. Use payout in the yield identity.

Worked examples

Example 1

Vignette: Aldervale Corp. trades at €50.00. It paid dividends of €1.60 per share over the last four quarters and earned €4.00 per share over the same period. Analysts expect dividends to grow 5% over the next year. Q1: What is the trailing dividend yield? Q2: What is the forward dividend yield? Q3: What is the trailing P/E, and does yield equal payout ÷ P/E?

Show the solution

Q1: Trailing yield = D0 ÷ P0 = 1.60 ÷ 50.00 = 3.2%.
Q2: D1 = 1.60 × 1.05 = 1.68. Forward yield = 1.68 ÷ 50.00 = 3.36%.
Q3: Trailing P/E = 50.00 ÷ 4.00 = 12.5. Payout = 1.60 ÷ 4.00 = 0.40.
Check: payout ÷ P/E = 0.40 ÷ 12.5 = 0.032 = 3.2%, which matches the trailing yield.

Answer: Trailing yield 3.2%; forward yield 3.36%; trailing P/E 12.5, and yield = 0.40 ÷ 12.5 = 3.2%.

Example 2

Vignette: Brightmoor Ltd. has a current price of $40.00. Its last dividend was $1.50 per share. Dividends are expected to grow at a constant 4% indefinitely. The analyst estimates the required return at 9%. Q1: What is the Gordon growth value? Q2: What is the forward dividend yield implied by that value? Q3: If the stock is priced at $40.00, what required return does the market price imply?

Show the solution

Q1: D1 = 1.50 × 1.04 = 1.56. Value = 1.56 ÷ (0.09 − 0.04) = 1.56 ÷ 0.05 = $31.20.
Q2: Forward yield at value = 1.56 ÷ 31.20 = 5.0%, which equals r − g = 9% − 4%.
Q3: Implied r = D1 ÷ P0 + g = 1.56 ÷ 40.00 + 0.04 = 0.039 + 0.04 = 7.9%.
Interpretation: the market price of $40.00 is above the $31.20 value, so the stock looks overvalued at a 9% required return; the market accepts a lower return of 7.9%.

Answer: Value $31.20; implied yield 5.0%; market-implied required return 7.9%.

Exam tips

Underline whether the dividend given is last paid (D0) or expected (D1) before you calculate anything.
Use yield = payout ÷ P/E to cross-check answers; it takes seconds and catches basis mismatches.
Expect interpretation questions: be ready to say why a high yield may signal risk or a coming dividend cut rather than undervaluation.
When Gordon growth is used, confirm r > g and constant growth; if the vignette describes changing growth, a multistage model is needed instead.
Remember there is no penalty for wrong answers, so answer every question even if you must eliminate options and guess.

Dividend Yield and Dividend-Based Valuation Multiples in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dividend Yield and Dividend-Based Valuation Multiples: frequently asked questions

What is the difference between trailing and forward dividend yield?

Trailing dividend yield divides the last four quarters of dividends by the current price. Forward yield divides the expected next-12-month dividend by the current price. With growing dividends, forward yield is higher.

How does dividend yield relate to P/E and payout ratio?

Dividend yield equals payout ratio divided by P/E, because D ÷ P = (D ÷ E) ÷ (P ÷ E). Keep both inputs on the same basis, trailing or forward.

How does the Gordon growth model connect to dividend yield?

Gordon growth gives P0 = D1 ÷ (r − g). Rearranged, forward yield D1 ÷ P0 equals r − g. So required return is forward yield plus constant growth, provided growth is constant and r exceeds g.

Why is dividend yield a limited valuation indicator?

It ignores growth and retained earnings, excludes buybacks and can be inflated by a falling price. It is most useful for comparing firms with similar payout policy, growth and risk.