The denominator is the whole problem. Price changes every second the market is open, and the dividend changes at most a few times a year. So on any given day almost all of the movement in a dividend yield comes from the price. A stock that falls from $80 to $50 while continuing to pay $3.20 a year sees its yield rise from 4% to 6.4%, and the holder is worse off by $30 a share. The figure went up because something bad happened.
This runs the opposite way too. A company that raises its payment while its shares rise faster can show a falling yield during a period in which shareholders received more cash than ever. Neither direction is informative on its own, which is the practical reason to read the yield alongside what the dividend itself has been doing rather than as a standalone score.
Trailing, forward and indicated versions answer different questions. A trailing yield divides the dividends actually paid over the past twelve months by the current price, so it is a fact about history over a price from today. A forward or indicated yield takes the most recently declared payment, annualizes it, and divides by the current price, so it is an assumption about the future over a price from today. They diverge whenever a company has just raised, cut or suspended its dividend, which is exactly when the number is being looked at. Sources rarely label which one they are quoting, and because no published standard governs the calculation for an individual stock, there is no way to tell from the figure itself.
The rule that exists governs funds, and it is aimed at precisely this confusion. 17 CFR 230.482 covers advertising by an investment company. Paragraph (d) applies to an open-end management investment company or a trust account, which covers ordinary mutual funds and exchange-traded funds but not money market funds, whose advertising is dealt with separately in paragraph (e). Where such a fund's advertisement quotes a current yield, paragraph (d)(1) requires that the yield be based on the computation prescribed in Form N-1A, that it be "accompanied by quotations of total return," that it be "set out in no greater prominence than the required quotations of total return," and that the length and last day of the base period be identified next to it with no less prominence. Two things follow. A fund's advertised yield is not this simple ratio; it is a prescribed computation, which is why a fund's stated yield and the average yield of its holdings can differ. And the SEC's response to yield being quoted alone was to require that total return appear beside it and be at least as prominent, which is the regulator writing the objection to yield-chasing into the advertising rule.
What the yield does not tell you. It says nothing about whether the payment will continue, since a dividend is declared at the board's discretion and can be cut. It says nothing about total return, because it ignores the share price entirely except as a divisor. It says nothing about tax, since the rate depends on the payer and on a holding period rather than on the size of the payment. And it says nothing about whether the cash is being funded out of earnings. Those questions belong with dividends themselves, and the answers there are what make a yield figure interpretable.
