Nov. 13th 2020
Knowing the difference between trailing and forward dividends and their corresponding yield metrics will help you evaluate, compare and choose the investments that are best for your situation. Our first step is to look at what dividends are, where they come from, and how frequently they are payed. We’ll then discuss the details of what trailing and forward dividends are and how you can use them to help understand the income your investments will generate now and in the future.
What is a Dividend?
Companies have many options for what to do with the profits their business generates. To help their business grow, a company can put some of those profits back into the company to fund research and development (R&D) or pay for acquisitions. Publicly traded companies will often give back some of their profits to their shareholders as a thank-you for the trust they have in their business. Two common ways of giving back to shareholders are through open-market share repurchases (which boost share price) and the more traditional dividend payments to shareholders.
With dividends, a company decides to give some portion of their profits directly back to their shareholders in the form of a cash payment. Individual shareholders usually have the option of reinvesting those dividend payments by purchasing more of the company’s shares (typically done automatically via a dividend reinvestment plan [DRIP]), or by receiving the dividend payments in cash.
When a company declares a dividend, it specifies the amount of the dividend on a per share basis. For example, the fictitious company XYZ declared a dividend of $0.25 per share. This means that for each share of the company’s stock that you own, you will be paid $0.25. Thus the total amount you receive from this dividend payment is $0.25 times the number of shares owned.
As an example, if you were a shareholder of XYZ and owned 100 shares, their dividend payment of $0.25 per share would net you $25:
Dividend Payment Frequency
The frequency of dividend payments varies. In the US and Canada, companies typically pay dividends on a quarterly basis – that is, 4 times a year. However some REITs will pay monthly (i.e. 12 times per year). In the UK and developed Asian markets, bi-annual (2 times per year) dividend payments are most common. In Europe companies typically pay dividends annually. Sometimes companies will even pay special, one-off dividends, such as when Microsoft (MSFT) payed a special dividend of $3 per share in 2004.
Because of the difference in payment frequency, when analyzing and comparing dividends from different companies, investors look at the annual dividend amount, rather than the individual period amounts (i.e. bi-annual, quarterly or monthly). So for the fictitious company XYZ that pays a dividend of $0.25 per share each quarter, an investor that owned 100 shares would receive $100 per year in dividends:
What Dividends Mean to Investors
By looking at a company’s annual dividend amount, investors can judge how much money they will earn by owning the company’s stock.
However, since dividends are paid out of company profits, and profits are rarely stable, a company’s dividend payments are not always the same.
A company’s profits depend on 3 main factors: the company’s own execution of their business; the general economic environment for the sector/industry in which they operate; and the broader, global economic environment. A company might make a profit one year, but swing to a loss the next.
If a company’s profits have been lower for long enough, or the company foresees their profits dropping for a significant length of the time, they may choose to lower or even eliminate dividend payments. As an example, many formerly profitable companies, such as Carnival (CCL) and American Airlines (AAL), eliminated their dividends in early 2020 because of the drastic, negative impact that COVID-19 had on their businesses.
Ideally, investors are looking for companies that have a long history of stable, increasing dividend payments. Any uncertainty in the amount of the company’s dividend can lead to fluctuations in the stock price as investors re-evaluate a stock’s value.
There are also many investors who rely on dividend payments as a source of income. For example, many retirees live off of the dividends generated by their investments. If those dividend amounts change, it can have significant consequences on the retiree’s daily lives.
Due to the potential uncertainty around dividend payments, there are 2 main ways of calculating a company’s annual dividend: trailing 12 month dividends and forward dividends.
Trailing 12 Month Dividends
Trailing 12 Month (TTM) Dividends are the simplest way of looking at and calculating a company’s annual dividend amount. They are calculated from actual dividend payments made by the company over the last 12 months. To calculate a company’s TTM dividends, all dividend amounts from the last 12 months are added together to arrive at the total dividends paid over the last year.
For example, if our fictitious company, XYZ, paid a dividend of $0.20 per share in February, May and August, and a dividend of $0.25 per share in November, their annual trailing 12 month dividend would be $0.85 per share. That is:
($0.20 * 3) + $0.25 = $0.85. For an investor that owned 100 shares of XYZ during those 12 months, the TTM dividend resulted in a total of $85 in dividend payments.
Forward Dividends, on the other hand, are extrapolated from the company’s last dividend payment or announcement. Instead of looking back at the past payments, the forward dividend assumes that the most recent dividend payment will be continued for the next 12 months.
For example, if our fictitious company, XYZ, paid their most recent quarterly dividend of $0.25 per share, their annual forward dividend would be $1.00. That is:
$0.25 * 4 = $1.00. For an investor that owns 100 shares of XYZ, the forward dividend would be worth a total of $100 in dividend payments over the next 12 months.
The forward dividend calculation also applies when a company suspends or eliminates its dividend. In this case, because the suspension announcement means the company will not pay a dividend, the forward dividend is considered to be 0. Investors that own shares in that company will not receive any dividend payments as long as the company’s dividend has been suspended. As mentioned above, this can have significant affects on the company’s stock price as well as on some individual investor’s daily lives.
As seen in our fictitious example company, XYZ, the trailing 12 month dividend may not always be the same as the forward dividend. This is especially true when there have been recent changes (positive or negative) in the company’s paid or announced dividend amounts.
What Is Dividend Yield?
Annual dividend amounts between companies can not be directly compared. An annual dividend of $1 per share from company XYZ is not the same as an annual dividend of $1 per share from company ABCD. This is because each company’s stock may trade at a different price, and the amount of shares that you own of each stock may be different. Both of which may lead to different total amounts of dividend payments that you would receive.
So in order to help investors evaluate the dividends paid by a company, a fundamental metric called dividend yield was invented. Dividend yield (or simply a stock’s yield) is calculated as the annual dividend amount per share divided by the current share price, expressed as a percentage:
The dividend yield metric allows an investor to make comparisons between the annual dividends of companies, even when the dividend amounts paid by the company differ and the company’s stocks trade at different prices. A stock’s yield gives investors a direct and useful way of analyzing and comparing potential or current investments. It is also particularly useful for investors who need to find the best dividend stocks when building an income generating portfolio of investments.
Different Ways of Calculating Dividend Yield
Because there are multiple ways of calculating a stock’s annual dividend amount, there are also different ways of calculating a stock’s dividend yield.
The trailing 12 month (TTM) dividend amount is used to calculate a stock’s trailing 12 month dividend yield:
While the forward dividend amount is used to calculate a stock’s forward dividend yield:
If our fictitious example stock, XYZ, trades at $10 per share, the TTM yield would be
($0.85 / $10) * 100 = 8.5%.
However, the forward dividend yield for XYZ is
($1 / $10) * 100 = 10%.
When to Use Trailing 12 Month vs Forward Dividend Yield?
The TTM dividend yield is a backward looking metric that uses known values to measure the worth of a company’s dividend. But as is so often the case in the investment world, past performance does not imply future returns. Just because a company has paid a certain amount in dividends over the last year, does not mean that the company will continue to pay the same dividend amount for the next 12 months. Investors during the financial crisis of 2008 or the pandemic crisis of 2020 will be acutely aware of how dividend payments can change very quickly when companies are fighting to stay afloat.
Forward dividend yield is a forward looking metric that uses assumed dividend payments to measure the worth of a company’s dividend. But like the TTM dividend yield, forward dividend yield values are not a guarantee of payment – they are only an assumption based on current conditions. Forward yields can change (up or down) depending on many factors. However, forward dividend yield is a more useful metric to fixed income investors than the TTM dividend yield as forward yield allows for a more accurate estimate of future income.
Dividend investors of all types must be aware that unknown changes in a company’s results or in the broader economy can have effects on the dividends paid by the stocks in their portfolios. Regular evaluation of the stocks in your portfolio and their TTM and forward dividends will help you maintain your investment goals.
Tracking Your Investment’s Dividends
If you’re looking for a way to easily evaluate and analyze your portfolio’s dividends, StockMarketEye can help. Using data freely available on the web, view TTM and forward dividend values for your holdings, or analyze and compare watchlists of stocks that you’re shopping for. You’ll find more information on the various metrics available for tracking dividends, as well as for tracking the performance of your portfolio on our site.