While holding a company's stock, an investor expects to be rewarded with an increase in the stock's value. This may come in the form of dividend payments or growth in the price of the stock. Using trailing and forward dividend information, the investor can assess the percentage value a stock has or will return based on dividends paid by the company over several months or years.
Dividend Payments Explained
Corporations distribute a portion of their net income to investors in the form of dividends. New companies may not have enough net income to pay any dividends, while mature companies may pay out a substantial amount of their net income as dividends. Dividends make up part of the total yield, or return, on a stock. The stock's price appreciation makes up the remainder. Investors and analysts use a dividend yield formula to measure a stock's percent return from dividends at set points in time. An investor using the formula takes the stock's dividend at a certain point in time and divides it by the stock's initial price at the same point in time.
What is a Forward Dividend?
Forward dividends, or expected dividends, are a projected value expected to be paid in a specific future time period. Investors may use forward dividends to calculate the expected dividend yield for a specific stock or portfolio of stocks. The forward dividend is calculated using the most recent quarter's dividend and annualizing it to represent a full year's payment. The forward dividend yield is calculated by dividing the forward dividend by the current stock price. The forward dividend yield is irrelevant if, for example, all of the stocks are held in young companies that do not yet pay dividends and are not expected to for several years.
Trailing Dividends Explained
Trailing dividends are the exact opposite of forward dividends – the company has already paid them. The dividend payments might have been paid on a quarterly basis or an annual basis. Trailing dividends are used in the dividend yield formula to analyze historical stock returns from dividends, as well as to provide a benchmark or estimate for future dividend yields. However, the history of a firm's dividend payouts does not always coincide with its future dividend payment plans for various reasons. If an investor knows a company plans to retain more of its net income in the upcoming year, this should be factored in to the forward dividend estimate.
Analyzing the Trailing Annual Dividend Rate
Forward and trailing dividends are used by investors and analysts to study a company's trends in dividend yield over time. When a company pays lower dividends relative to its stock price, it may be holding more of its earnings to apply to projects that help grow the business. Successful business growth could increase the firm's stock price. Conversely, the company may be showing signs of financial trouble. A lower dividend as a percent of the stock's price could also result from a substantial stock price increase. Because of these reasons, a lower forward dividend yield warrants a closer look at the company's financial information, but does not necessarily signal trouble.
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Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer for online finance publications since 2011, including eHow Money, The Motley Fool, and Sapling.com. She has also edited for several online finance publications, including The Balance, Opposing Views:Money, Synonym:Money, and Zacks.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.