Dividend yield: a complete guide to smart investing

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Dividend yield has become one of the most sought-after metrics. For many savers seeking regular income without taking excessive risks in the stock market, looking at dividend-paying companies has become almost a necessity for the small investor. In an environment where interest rates have been at very low levels for many years and inflation has eroded a significant portion of the returns on conservative savings.

Dividend investing is not simply about chasing the highest percentageRather, it's about understanding what's being measured, how it's calculated, what risks are involved, and whether those payments can be sustained over time. Furthermore, dividend yield doesn't exist in isolation: it must be considered in the context of other ratios such as the P/E ratio, ROE, leverage, and payout ratio, as well as the stock price's performance, which can either multiply or ruin the perceived return of an attractive dividend.

What exactly is dividend yield?

Dividend yield measures the percentage of dividend The dividend a stock pays out in a year relative to its market price. It's a quick way to see how many euros you could receive in dividends for every 100 euros invested, provided the company adheres to its payment policy.

The most common formula is very simple.The dividend yield is calculated by taking the annual dividend per share and dividing it by the current share price, then multiplying by 100 to convert it to a percentage. For example, if a company pays €0,06 annually in dividends and its share price is €1,20, the dividend yield will be 5% (0,06 / 1,20 x 100).

However, not all analysts use the same calculation criteria.Some prefer to look at the dividends actually paid out in the last 12 months; others base their calculations on the dividend expected to be received in the next 12 months, according to company guidelines and market estimates; and there are even those who annualize the last quarterly dividend by multiplying it by four. Each approach has its nuances and can yield slightly different figures.

A key point is that dividend yields are constantly changing.Because it depends on the share price, which fluctuates daily. If the share price falls and the dividend remains the same, the percentage increases, and vice versa: if the price rises and the dividend doesn't change, the yield decreases. Therefore, a very high dividend yield may reflect market distrust and a negative reaction towards the stock.

It is also worth remembering that many companies simply do not distribute dividends.This is especially true for growth companies that prefer to reinvest most of their profits in expanding the business. This doesn't mean they aren't good investments, simply that the potential return will come from share price appreciation rather than from regular cash flow to shareholders.

How is dividend yield calculated in practice?

Calculating dividend yield is not a mystery from a technical point of viewHowever, it is essential to be rigorous with the data used. The first step is to identify how much the company has paid in dividends per share in the last year or how much it is expected to pay in the next 12 months.

If the company pays dividends quarterlyYou will need to add together the four amounts paid during the last 12 months. If you only pay once a year, that amount will suffice. Nowadays, almost all brokers and platforms signals They offer this data already calculated, which makes the work much easier for the individual investor.

The second ingredient is the current stock pricewhich can also be obtained immediately on any trading platform or financial portal. From there, the classic formula is applied: (Annual dividend per share / Current share price) x 100.

Imagine a stock that trades at $20 and pays $1 annually in dividends.The dividend yield will be (1 / 20) x 100 = 5%. If the share price were to fall to $10 with no change in the dividend, the yield would jump to 10%. And if the price were to rise to $25, the yield would drop to 4%. As you can see, the picture changes significantly simply by moving the price.

Changes in the dividend also move the needle on yield If the share price remains stable, with a price of $100, a dividend increase from $5 to $7 implies a rise in the dividend yield from 5% to 7%. These variations are significant because they are often linked to the company's strategic decisions, its financial situation, or its business outlook.

Dividend yield versus total return

It is a very common mistake to focus solely on dividend yield. without considering the total return on investment. The dividend is only one part of what you can gain (or lose) with a stock; the other part comes from the appreciation or decline in its stock price.

Total return combines dividends and capital gains (or losses)A practical way to look at it is to add up the dividend income received during the investment period and the capital gains (difference between the sale price and the purchase price), and subtract the capital gains taxes that apply in your country.

The conceptual formula would be something like this:(Dividend Income + Capital Gains) – Capital Gains Tax. For example, if you buy a stock for $50, sell it a year later for $70, and have received $3 in dividends, your gross profit is $23. If you pay 15% capital gains tax on the $20 gain, you would subtract $3, leaving your net profit at $20.

This approach allows us to see situations where a high dividend does not compensate for a sharp drop in share price.A company with a 10% dividend yield that loses 27% of its market value can leave you with a clearly negative net result. That was the case with a company like UnipolSai Spa in a specific analysis: its yield was very high, but the stock had fallen almost 27% in three months.

On the other hand, there are companies with reasonably high dividends and good stock market performance.One example was COMMUNICATIONS SALES & LEASING, with a dividend yield close to 7,9% and a price increase of around 30% in a few months, making it a very attractive option from the point of view of total profitability.

Dividends, diversification, and selection tools

Investing in high dividend yield companies can be a powerful strategy For those seeking recurring passive income, it's not a magic bullet nor is it without risks. Choosing solely based on the percentage can lead you to troubled companies, with declining business models or unsustainable dividends.

Diversification is key to managing these risksSpreading investment across various sectors (energy, telecommunications, banking, infrastructure, etc.) and different types of assets helps to reduce the impact of a dividend cut or suspension on a specific company.

Today there are tools such as market screeners which greatly facilitate this taskThese filters allow you to cross-reference data such as dividend yield, profit growth, share price performance over 3 months or 1 year, debt levels, or valuation multiples, to identify companies that combine good yield with a solid business.

It is very important to keep in mind that no commercial material or quick analysis can replace personalized advice.Many advertising materials from brokers and financial institutions make it clear that they are not providing individualized recommendations and that past performance is no guarantee of future results. Investors assume the risk of their decisions and must be aware that both dividends and stock prices can change drastically; having a financial budget helps to plan.

This prudence is especially important when using forecasts of future dividends.Companies can modify their shareholder remuneration policy if their financial conditions change, if they take on debt to grow, if they undertake strategic investments, or if the regulatory environment becomes more complex. Therefore, it is advisable to periodically review the portfolio and not assume that a current dividend will remain in place forever.

Key indicators: pay-out ratio, ROE, P/E ratio and leverage

To assess whether a dividend is sustainable, it is not enough to look at the percentage of return.Analysts often pay close attention to ratios such as the pay out, the ROE, the P/E ratio, the level of debt (leverage) and the treasury management to assess the quality and stability of those payments.

El pay-out ratio It measures what portion of net profits the company allocates to dividends.It is calculated by dividing the total dividends paid by net income, or by dividing the dividend per share by earnings per share. A very high payout ratio, especially if it exceeds 100%, usually raises doubts about the company's ability to maintain that dividend in the long term.

Conversely, a low payout ratio may suggest that the company is reinvesting a large portion of its profits. in expanding its operations or strengthening its balance sheet. That doesn't necessarily have to be a bad thing: sometimes it means that the stock's potential for appreciation is high, even if the dividend is modest.

ROE (return on equity) indicates how much profit the company generates with its shareholders' capital.Reviews of high-dividend Spanish companies include cases like Naturhouse, with ROE exceeding 30%, or Logista, with figures around 48%. These high percentages point to very efficient businesses generating value for shareholders.

The P/E ratio (price/earnings) and other multiples such as the PCF (price/cash flow) or the PVC (price/book value) They help determine whether high-dividend companies are expensive or cheap compared to their own history or the market. In the analyzed groups of stocks with dividend yields above 7% and 6% on the Spanish Continuous Market, the average P/E ratios are around 17x-19x, with some companies like Metrovacesa and Elecnor exhibiting higher multiples.

Finally, the net financial debt/EBITDA ratio (net financial debt to EBITDA) is key to measuring leverage.Among high-dividend companies on the Spanish stock exchange, the average dividend is around 2,2 times, with particularly prudent examples like MediaForEurope and Repsol, with levels below 1 time EBITDA. These robust balance sheets inspire confidence in maintaining or even increasing shareholder returns.

Numerical examples and dividend yield behavior

To fully understand how dividend yield works, it's helpful to play with simple scenarios.If a stock is trading at $100 and the annual dividend is $5, its yield is 5%. If the price falls to $50 and the dividend remains the same, the dividend yield jumps to 10%. However, this price drop could be due to business problems that jeopardize future payments.

If instead we keep the price constant and change the dividendWith a stable share price of $100, raising the dividend from $5 to $7 increases the yield from 5% to 7%. These types of increases are usually well-received by the market if the new payout level is perceived as sustainable and not jeopardizing the company's finances.

It is useful to compare different companies with similar dividend yields but different stock market trajectoriesA firm with a 10% yield and a sharp drop in price can end up being a value trap, while another with a 6-8% yield and 20-30% growth in the stock market usually represents a much more interesting combination.

There are also companies that have built their reputation precisely on the stability and growth of their dividends.Verizon, for example, has historically maintained a dividend yield of approximately 5% for many years, positioning itself as a benchmark within the so-called "dividend stocks".

In European markets and especially on the Spanish stock exchangeIt is common to find sectors traditionally associated with stable dividend policies, such as utilities (electricity and gas), integrated oil companies, or established banks. But even in these cases, history shows that dividend cuts can occur when the interest rate cycle, regulations, or investment needs change.

Large Spanish companies with high dividend yields

If we focus on the Spanish Continuous Market, there is a prominent group of companies whose estimated dividend yield for 2025 exceeds 7%, and which also present reasonably solid balance sheets and non-excessive valuation multiples.

The first group identifies eight companies with an average dividend yield close to 9,6%. and with two representatives in the Ibex 35: Enagás and Logista. This group includes, among others, Elecnor, Atresmedia, Naturhouse, Neinor Homes, MFE-MediaForEurope, Metrovacesa, Enagás and Logista Integral.

The approximate dividend yield figures for 2025 in this group They fall within a broad range: Elecnor is around 13,06%, Atresmedia 12,56%, Naturhouse 10,20%, Neinor Homes around 9,93%, MFE 8,21%, Metrovacesa 7,79%, Enagás 7,61%, and Logista 7,37%. These figures are well above the market average.

In terms of ROE, the group also presents very interesting metrics.with an average of around 16,5%. Naturhouse stands out with an ROE close to 31,8% and Logista with figures above 48%, reflecting a remarkable capacity to generate profitability on invested capital.

In terms of evaluation, PERs are not particularly demanding in many cases.Atresmedia's P/E ratio is around 10x earnings, MFE around 6x, and both Enagás and Logista are trading at around 12x. The group's average P/E ratio is somewhat inflated by unique situations, such as Metrovacesa or Elecnor, which show higher multiples due to the nature of their businesses or accounting effects.

Expanding the universe: Spanish companies with dividends above 6%

If we broaden the filter and include companies with a dividend yield above 6%The investment universe grows to about 14 companies from the continuous market, of which approximately half belong to the Ibex 35.

This group includes names that are very familiar to the Spanish investor. Companies such as Repsol, Telefónica, Naturgy, CaixaBank, and Banco Sabadell, in addition to the aforementioned Enagás, Logista, and Naturhouse, among others. In other words, the group includes energy companies, banks, telecommunications companies, and service and industrial companies.

The average dividend yield in this expanded group is around 8,3%.with an average ROE of just over 14%. The average P/E ratio is around 16-17 times, while the PCF is around 7x and the PVC around 2x, which generally does not suggest extreme overvaluation for a group that offers such high yields.

The average leverage, measured by Net Debt/EBITDA, is close to 2,2 times.This is a reasonable level for mature companies that can afford a generous dividend policy. Within the group, particularly conservative balance sheets are seen in companies like MediaForEurope and Repsol, with very moderate debt ratios.

If we look at more medium-term forecasts, such as the estimates for 2026The average dividend yield of this group could approach 9,5%, with extreme cases such as Banco Sabadell, boosted by extraordinary dividends linked to the sale of TSB, with occasional yields exceeding 20%, or companies like Neinor, Atresmedia and Naturhouse moving in double digits.

Telefónica's leading role and the changes in its dividend

Telefónica has been one of the leading examples of dividend investment in Spain for years.With stable and visible payouts, its yield in recent years has fluctuated between approximately 6,5% and 8%, depending on the share price. Paying out around €0,30 per share, with the share price around €4,3, the return was close to 7%, placing it among the most generous in the index.

In the European telecommunications context, Telefónica's dividend also stood out.Only a few stocks like Freenet or Sunrise exceeded that 7%, while giants like Deutsche Telekom, Orange or Vodafone ranged between 3,8% and 5,5%, below what the shareholder of the Spanish operator received.

However, the company has announced a significant cut in its shareholder remuneration policyAlthough it maintains the dividend payout of €0,30 per share for the 2025 fiscal year (€0,15 in December and €0,15 in June), it will reduce the dividend to €0,15 annually from 2026 onwards. With a share price close to €3,6, the future yield would be around 4,1%, which would move it from the top of the Ibex dividend ranking to a more mid-table position.

This adjustment has a clear objective: to strengthen the balance sheet and reduce leverage.Currently, its equity is around 2,8 times EBITDA, slightly above the industry average. The company aims to save approximately €850 million annually with this reduction, funds that could be used to decrease debt and provide more room for consolidation operations in its key markets.

Analysts are divided on the impact of this decisionSome point out that the savings themselves are not enormous and that the key will be how that capital is reinvested. Others believe that the cut has been greater than expected and that free cash flow (FCF) forecasts have fallen short of consensus, which explains much of the sharp drop in the share price after the announcement of the new strategic plan.

Prospects for Telefónica's dividend recovery

The operator's new plan proposes a dividend floor of 0,15 euros and a gradual recovery. as cash generation improves. The goal is to allocate between 40% and 60% of adjusted free cash flow, excluding the cost of the radio spectrum and payments from the a joint venture with Virgin Media O2 in the UK and the costs associated with restructuring processes.

By removing these elements, the company aims to build a more stable and predictable FCF.Although in the short term it may appear lower than many analysts expected. According to some estimates, by 2027, taking a midpoint of the FCF range and a pay out At 50%, the dividend could be around 0,20 euros, still slightly below the current 0,30 euros.

Meanwhile, Telefónica expects to increase its free cash flow from around 1.900 billion euros From the end of this year to approximately €2.700 billion in 2026, representing a jump of almost €800 million. Both the future dividend and the credibility of the forecasts the company presents to the market depend on this free cash flow.

For major reference shareholders, such as STC, Criteria or SEPIFor the shareholders, who each own approximately 10% of the capital, the dividend has been a central component of expected profitability, allowing them to recoup part of their investment year after year. The cut slows that return, but could contribute to a healthier company in the long term.

Despite the adjustment, some investment banks still see interesting potential for appreciation. in Telefónica's stock. Firms such as Goldman Sachs and Morgan Stanley have set their target prices significantly above the current share price, which, combined with the dividend that will still be paid in the coming quarters, creates an attractive entry point for certain types of investors.

Other major dividend payers on the Spanish stock exchange

Beyond Telefónica, the Spanish stock market is full of companies with very significant dividend policiesMany of these companies concentrate a large part of their payments between the end of the year and the first quarter, making those months a real "golden season" for investors looking to collect coupons in the form of dividends.

Between November and February, Spanish companies can distribute close to 6.000 billion euros. in dividends, with heavyweights like Mapfre, Bankinter, Merlin, Enagás, Sabadell, Redeia, Endesa, Repsol, and Iberdrola, as well as other stocks such as IAG and Fluidra. Their estimated dividend yields for the next 12 months range, depending on the case, from 3% to figures close to 17% when extraordinary dividends are included.

Mapfre, for example, offers an interim dividend of 0,07 euros gross per share And despite the stock's strong rally (rises of over 60% at times this year), it maintains a dividend yield above 5%. Analysts highlight the strength of its results, improved margins, and sound solvency position, which supports a sustained dividend policy.

Bankinter's dividend yield is around 4,7% over the next 12 months.After paying out €0,15 in June and a second dividend of €0,30 in December as an interim dividend for the year, the stock has risen sharply this year and its short-term upside potential is more limited according to some analysts. However, many investors still see its dividend as a key attraction.

Merlin Properties, as a REIT, also stands out for its shareholder returnsWith a dividend yield of around 3,5% and interim payments supplemented by subsequent dividends, its focus on data centers and a low interest rate environment have boosted its share price, although doubts linger about whether a bubble is forming in the data center segment.

The defensive appeal of Enagás, Redeia and Endesa

In the utilities sector, Enagás is one of the star stocks for dividend lovers.With dividend yields exceeding 7% over 12 months, the company distributes an interim payment of 0,40 euros per share in December and completes the remuneration with another payment in July, maintaining its commitment to deliver at least 1 euro per share for the year.

Analysts highlight Enagás's defensive profileIts regulated nature and the visibility of its cash flows reinforce confidence in its dividend policy. Even so, its debt levels and the future regulatory framework, key factors in this type of business, are being closely monitored.

Redeia (formerly Red Eléctrica) has also established itself as a dividend classicWith regular payments and significant stock market appreciation potential according to various analysts, its regulated network business, the investments needed to integrate more renewables, strengthen interconnections and modernize infrastructure, and the improved financial return on regulated assets create an attractive medium-term scenario.

Endesa, for its part, has defined a minimum ordinary dividend of 1 euro gross per share for several fiscal years, plus share buybacks that add around an additional 2% return to the shareholder. The combination of cash dividend plus buybacks It places its total yield above 4%-6%, depending on the timing and forecasts, supported by a robust financial structure.

In all these cases, the investor must focus on the sustainability of the payments.Cash generation capacity, debt level, regulation, and investment plans determine whether these dividends can be maintained or grown without jeopardizing the solvency of the companies.

Repsol, Iberdrola and the banks: dividend and growth potential

Repsol is another of the major contributors to the Spanish stock market.With a dividend yield of around 6,5% and a clear commitment to shareholder returns, the oil company has distributed approximately €0,975 gross per share in cash in the past year, plans to distribute several billion euros in cash until 2027, and supplements these payments with intensive share buyback and redemption programs.

The electricity company Iberdrola offers a dividend yield of close to 4%.with increasing payments and a strategy based on regulated network businesses and generation contracts with lower volatility. It uses the formula of script dividendallowing the shareholder to choose between receiving payment in cash or in new shares, which provides some tax and financial flexibility.

Banks also play a prominent role in the Spanish dividend landscapeCaixaBank distributes a yield of over 6% in some scenarios, with solid capital ratios, and Banco Sabadell has even shown estimated double-digit returns by including the extraordinary dividend derived from the sale of TSB, which boosts its payments in a specific period.

In the case of Sabadell, the entity plans to distribute 0,07 euros per share in cash. This includes a second interim dividend for the year, plus a potential extraordinary dividend of €0,50 linked to the divestment in the United Kingdom. This raises the 12-month yield to around 16%, although this is an exceptional situation that cannot be extrapolated to future years.

For the dividend investor, understanding what part of the yield comes from ordinary payments and what part from extraordinary dividends is crucial. This is fundamental. Extraordinary payments can provide a temporary boost to profitability, but they shouldn't be confused with a recurring distribution capacity. Once the payment is made, that flow doesn't repeat itself unless there are similar new corporate transactions.

What is a “good” dividend yield

Determining whether a dividend yield is good or not requires comparing it with several benchmarks.A logical first step is to look at the average yield of the sector in which the company is listed and the average yield of the market or index where it is listed. A stock that pays 5% in a sector where the average is 3% may be attractive… or it may be reflecting a risk that the market has already priced in.

It is also key to assess the sustainability of that dividend in light of the payout ratio, cash generation, and debt levels.An 8% yield with a 120% payout and very high debt can be a warning sign, while a 4% return with a 40% payout and ample cash can be much more solid in the long term.

At the same time, it should not be forgotten that many high-growth companies do not pay dividends. Because they prefer to reinvest their profits to expand, innovate, or acquire other companies. In these cases, the expected return comes from stock appreciation and can far exceed the sum of dividends and capital gains from more mature companies.

Therefore, a "good" dividend yield depends on the type of investor strategy.Those seeking regular income and stability will focus on mature, regulated companies with robust balance sheets and clear dividend policies. Those prioritizing long-term capital growth may accept lower or even zero yields in exchange for greater potential for appreciation.

In any case, dividend yield is a powerful tool for filtering and comparing investmentsHowever, it should never be used in isolation. Combined with other financial ratios, a qualitative analysis of the business, and good sector diversification, it can help build equity portfolios that generate recurring cash flows with a reasonable risk profile.

To fully understand what lies behind each dividend yield percentageHow it is calculated, what underpins it, and what could change it, is what makes the difference between simply chasing the highest number or building a solid, flexible, and realistic long-term dividend investment strategy.