Definition:

Forward Dividend Yield is a financial metric that estimates the expected annual dividend payments of a stock over the next year, expressed as a percentage of the current stock price.

Formula:

Forward Dividend Yield = (Expected Annual Dividends per Share / Current Stock Price) * 100

How to use the metric:

Investors use the Forward Dividend Yield to assess the potential income return from a stock investment relative to its price. It helps in comparing the income-generating potential of different stocks and making informed decisions about dividend-focused investments.

Limitations:

The Forward Dividend Yield is based on expected dividends, which may not be guaranteed. Companies can change their dividend policies, leading to discrepancies between expected and actual dividends. Additionally, it does not account for capital gains or losses, focusing solely on income return.

Applies to:

This metric is particularly useful in industries known for stable and predictable dividend payments, such as utilities, consumer staples, and real estate investment trusts (REITs).

Doesn't apply to:

It is less applicable to industries with volatile earnings and unpredictable dividend policies, such as technology or biotech, where companies might reinvest profits into growth rather than paying dividends.

Summary:

The Forward Dividend Yield is a useful tool for evaluating the income potential of dividend-paying stocks, especially in stable industries. However, it should be used with caution due to its reliance on expected dividends, which may not materialize as anticipated.