How is a stock's dividend yield calculated?

The dividend yield of a stock is an important metric for investors to understand how much return they can expect from dividends relative to the price they are paying for the stock. It is calculated by taking the annual dividend payment and dividing it by the stock's current market price. This gives investors insight into the income generated from their investment as a percentage of the stock’s price.

When the annual dividend amount is known, it can be directly compared to the price at which the stock is currently trading. For example, if a stock pays an annual dividend of $2 and its current market price is $50, the dividend yield would be $2 divided by $50, resulting in a yield of 4%. This percentage is particularly useful for comparing the attractiveness of different investments and assessing their income-generating potential.

Other calculations mentioned in the alternatives do not represent the traditional or correct formula for dividend yield. The other options focus on different measures, such as company profitability or earnings, which are not directly related to how dividend yield is derived. Therefore, the specified formula of dividing the annual dividend by the stock's current market price is the correct approach for calculating dividend yield.