The next dividend payment by Dizzle, Inc., will be $2.55 per share. The dividends are anticipated to maintain a growth rate of 6% forever. Assume the stock currently sells for $48.70 per share.
What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the expected capital gains yield?
The dividend yield on a stock is the rate of return the stock generates through dividend payments. The expected capital gains yield on the stock, on the other hand, is determined by the growth rate of the stock's dividends in the future.
Answer and Explanation:
Dividend yield is the ratio of dividend per share to current price per share, i.e.,
- dividend yield = dividend payment / current stock price
- dividend yield = 2.25 / 48.70
- dividend yield = 4.62%
The expected capital gains yield is the expected percentage growth in stock price. Since the dividend grow is constant, according to the dividend growth model, the price of the stock will also grow at the same rate as dividend. Thus the expected capital gains yield is 6%.
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3