The cash a company sends you for holding it
Some companies keep every dollar of profit to fund their own growth. Others send a portion to shareholders each quarter as a dividend. Dividend yield expresses that annual payment as a percentage of the current share price, so you can compare what different shares pay you for owning them.
A share costing $100 that pays $3 a year yields 3%. That payment arrives whether or not the share price rises, which is why investors who want income from their holdings pay close attention to it.
Johnson & Johnson, step by step
Johnson & Johnson recently paid an annual dividend of roughly $4.96 per share while trading around $155. Divide 4.96 by 155 and multiply by 100, giving a yield of approximately 3.2%.
The company has raised that payment every year for more than six decades, through recessions and market crashes. That record is the real signal, far more than the 3.2% itself, because it demonstrates the payment survives bad conditions.
Rounded recent figures, shown so the arithmetic is followable.
Why the highest yields are the most dangerous
Price sits on the bottom of this calculation, which produces a genuinely counterintuitive effect: when a share price collapses, its yield shoots up. A company whose shares halve while the dividend stays put doubles its yield overnight, and screens will rank it near the top.
That is exactly how beginners get caught. The market has usually pushed the price down because it doubts the dividend can continue. A yield of 9% or 12% is rarely generosity; it is a market prediction that the payment is about to be cut. Investors call this a yield trap, and the cut usually follows.
Checking the company can afford it
The question that protects you is simple: how much of what the company earns is being paid out? That fraction is the payout ratio. A company paying out 40% of profit has considerable room to keep paying if trading weakens. One paying out 95% has almost none.
Comparing the dividend against free cash flow is stricter still, because dividends are paid in cash rather than in accounting profit. If the total dividend bill exceeds free cash flow year after year, the company is funding payments from borrowing or savings, and that arrangement has a time limit.
Turning it into a rule in Stax
The rule that works is rarely the highest yield available. A moderate yield combined with a comfortable payout ratio and a long record of maintained payments describes a company that can keep paying, which is what an income investor is looking for.
Build a plan around that combination and let Stax replay it over five or more years of real prices. The test includes the periods when dividend-paying companies struggled, which is precisely the evidence worth having before you rely on the income.