If the current share price falls while the annual gross dividend remains unchanged, what happens to the gross dividend yield?

• A. Increases
• B. Decreases
• C. Stays the same
• D. Becomes negative

Answer: (A)

The gross dividend yield is the annual gross dividend divided by the current share price. If the price falls while the dividend stays the same, the denominator gets smaller, so the yield rises. In other words, you’re getting the same cash dividend for a lower price, which increases the percentage return on the investment. For example, with a fixed annual dividend, a drop in price from 40 to 30 raises the yield from 5% to about 6.67%. The yield moves inversely to price when the payout is unchanged. If the price were to rise, the yield would fall.