Forward vs Trailing Dividends and Yield

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 paid. 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?

A Dividend is when a company distributes its profits to its shareholders or reinvests the extra profits back into the company. 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).
• 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.

Dividend Amounts

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.

Calculating a Dividend Payout – Example

As an example, if you were a shareholder of XYZ and owned 100 shares, with 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) paid a special dividend of $3 per share in 2004.

Looking at the Annual Dividend Amount

Due to 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.
• 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 time, they may choose to lower or even eliminate dividend payments.

What to Look for in a Company Offering Dividends

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.

Counting Dividends

Due to the potential uncertainty around dividend payments, there are 2 main ways of calculating a company’s annual dividend:

1. Trailing 12 Month Dividends
2. Forward Dividends

Trailing 12 Month Dividends

Trailing 12 Month (TTM) Dividends are calculated from actual dividend payments made by the company over the last 12 months. They are the simplest way of looking at and calculating a company’s annual dividend amount.

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. If we want to calculate the TTM dividends that are paid out quarterly, you would calculate it as:

TTM Dividend Calculation Example

As an 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. You would calculate the TTM as:

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

Forward Dividends 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.

Depending on the dividend payment frequency, you would calculate the Forward dividends like:

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.

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.

What if a Company Suspends or Eliminates its Dividend?

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.

TTM vs. Forward Dividends Can Be Different

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?

A dividend yield is a financial ratio that shows the amount of money a company pays out in dividends each year relative to its stock price. It is calculated by dividing the annual dividend per share by the current price per share.

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 percent:

For example, if company XYZ pays annual dividends of $2 per share and its stock is currently trading at $80 per share, its dividend yield would be 2.5%.

Using the Dividend Yield for Better Investments

The dividend yield ratio is often used by investors to assess the potential return on their investment in a company’s stock. You can 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

There are multiple ways of calculating a stock’s annual dividend amount, there are also different ways of calculating a stock’s dividend yield. Here we show you some of the most common ways to calculate dividend yield:

TTM Dividend Yield Calculation

The trailing 12 month (TTM) dividend amount is used to calculate a stock’s trailing 12 month dividend yield:

Our fictitious example stock from company XYZ trades at $10 per share and the TTM dividend amount is $0.85. The TTM yield would be 8.5%:

Forward Dividend Yield Calculation

The forward dividend amount is used to calculate a stock’s forward dividend yield:

For the same company XYZ with a current stock price of $10 and the forward dividend amount is $1. This would make the forward dividend yield for XYZ, 10%:

When to Use Trailing 12 Month vs Forward Dividend Yield?

With these two methods of calculating the dividend yield, which method should you use?

Using TTM Yield for Investing

The TTM dividend yield is a backward looking metric that uses known values to measure the worth of a company’s dividend. However, as it 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.

This is why if you use TTM Yield, be aware of the past vs future implications and try to incorporate some forecasting into your investing decisions.

Using Forward Yield for Investing

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.

Regular Evaluation of Both Calculations is Recommended

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

The best way for investors to continue evaluating their dividends and yields for smarter decisions is to track and view their investments.

This is where the all-in-one stock tracking software of StockMarketEye can help. It easily integrates data freely available on the web, lets you view TTM and forward dividend values of your holdings, and you can 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.

Nick