Dividend yield is a stock’s annual dividends divided by its share price, expressed as a percentage — a $2.00 annual dividend on a $50 stock is a 4% yield. It measures the income rate an investor buys at today’s price, and in the alternatives market it has a cousin that deserves careful separation: the distribution rate.
The measure and its mechanics
Conventions worth keeping straight: trailing yield uses the past twelve months’ dividends (a fact); forward/indicated yield annualizes the current declared rate (a projection); and because price is the denominator, yield moves inversely with price — which is the origin of the yield trap, where a “cheap” high yield is often the market pricing a coming dividend cut. Yield also says nothing about safety: payout ratios, earnings coverage, and — for REITs — coverage of the dividend by cash flow measures are where sustainability lives. REIT dividends run structurally higher than the broad market’s (the 90% distribution requirement at work), with the tax character caveat: mostly ordinary income plus return-of-capital components, not qualified dividends.
Dividend yield vs. distribution rate — the alts distinction
Non-traded products — NAV REITs, non-traded BDCs, interval funds — typically quote a distribution rate: the annualized distribution divided by NAV or offering price. Two differences matter. First, the denominator is the sponsor’s own valuation, not a market price — a distribution rate can’t fall because the market marks the shares down, which makes it look steadier than a yield without being safer. Second, and more important: a distribution is not a dividend. Listed-market dividends are generally paid from earnings; non-traded distributions are board-declared cash payments that may be funded by income, but also by return of capital, borrowings, or offering proceeds — and the sourcing disclosure in the filings (what portion of distributions was covered by operating cash flow) is the single most informative number behind any quoted rate. A “6% distribution rate” covered 60% by earnings is, economically, a smaller yield plus a partial refund of the investor’s own money. The advisor’s translation habit: treat quoted rates as claims, and read the coverage before repeating them to clients.
FAQ
What is dividend yield in simple terms?
Annual dividend income as a percentage of the share price — $2 of dividends on a $50 stock is a 4% yield.
What's the difference between dividend yield and distribution rate?
Yield divides real dividends by a market price; a distribution rate divides board-declared distributions (which may include return of capital) by the sponsor’s NAV — softer numerator, softer denominator.
Is a high dividend yield good?
Only if it’s sustainable — very high yields often signal expected cuts or, in non-traded products, distributions running ahead of earnings. Coverage tells the truth the rate doesn’t.
Related terms
Distribution Rate · Return of Capital · REIT · Dividend Reinvestment Plan (DRIP) · NAV
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
