The dividend yield is the cash yield (comparable to the interest rate on a savings account) that we expect to receive on a share we own. For example, if I spent £100 on one share with a 5% dividend yield, then I would receive £5 in cash payments (dividends) each year I held the stock.

As well as it being a way of gauging the yield on the stock, it can also be a way of identifying undervalued stocks.

A company with a dividend yield significantly above current interest rates might be considered cheap though the precise figure changes over time, though many factors come in to play here.

In this case, it is the average dividend payment over the last five years divided by the average market capitalisation in each year.

Comparing this yield versus the current yield may give an indication as to whether the stock is undervalued.

Geraldine Weiss' investment approach was very focused on comparing historic average versus current yield - as she wrote, "I realised that each of these stocks has its own individual profile of value, its own criteria for high and low dividend yield. Some stocks would be undervalued when the yield would be 4% or 5% or 6%, and some would be undervalued when the yield hit 2% or 3%. But it was the repetition of the high yield that would indicate an undervalued area (time to buy) and the repetition of a low yield that would indicate an overvalued area (time to sell)."