What is Forward Dividend and Dividend Policy?

Halal Investment Series Part 12

When investing in a stock we often hear about forward dividend and dividend policy. A forward dividend yield estimates the dividend for the coming year expressed as a percentage of the current stock price. You can calculate the projected dividend for the year by annualizing the most recent actual dividend payment made by a stock. The way to calculate forward dividend yield is by dividing a stock’s current share price by a year’s worth of future dividend payments.

For example, if a company pays a 25-cent quarterly dividend and you assume the dividend will be consistent. You will expect the company to pay $1.00 in dividends over the course of the year. The forward dividend yield is 10% if the stock price is $10.

A trailing dividend yield is the opposite of a forward dividend yield and shows a company’s actual dividend payments relative to its share price over the previous 12 months. When future dividend payments are uncertain, you can use the trailing dividend yield to assess the value. The forward dividend yield is a more accurate tool when future dividend payments are predictable or have been announced.

Types of Dividend Policy’s

Its board of directors sets the company’s dividend policy. Typically, large corporations pay out dividends, but growing businesses frequently use excess profits for research, development, and business expansion. One common dividend policy is a stable dividend policy, in which the company pays dividends regardless of earnings level. The stable dividend policy aims to align the business’s goal for strategic growth regardless of quarterly earnings volatility.

On the other hand, constant dividend scenarios expose the investors to company earnings volatility. In the case of a constant dividend policy, the company pays the dividend yearly based on a percentage of the company’s earnings. A residual dividend policy pays anything after meeting the company’s own capital expenditures, and working capital needs.

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