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Suppose a stock had an initial price of $88 per share, paid a dividend of $2.10 per share during...

Question:

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:

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%

Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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