Suppose a stock had an initial price of $88 per share, paid a dividend of $2.10 per share during the year, and had an ending share price of $96.
What was the dividend yield and the capital gains yield?
Dividend yield reflects the rate of return an investor earns from dividend payments. Since dividends are taxable as ordinary income, the after-tax rate of return is lower than the pretax dividend yield.
Answer and Explanation:
Dividend yield is the ratio of dividend payment to current stock price:
- dividend yield = 2.1 / 88
- dividend yield = 2.39%
The capital gains yield is the percentage change in stock price, i.e.,
- capital gains yield = (96 - 88) / 88
- capital gains yield = 9.09%
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10