Question

Palm Tree Recreation has a share price of $26 today. If the company is expected to pay a dividend of $1.30 in one year, and its stock price is expected to grow to $30 at the end of the year, what is Palm Tree’s dividend yield and capital gains yield? What is your total return?

Answer 1

Dividend yield = D/P₀

D = Dividend

P₀ = Current share price

So, dividend yield = 1.30/26 = 5%

Capital Gains Yield = (P1 – P0) / P0

P₀ = Current share price

P₁ = share price at the end of year1

Capital gain yield = $(30 - 26)/26 = 15.38%

Total return = (P1 – P0 + D) / P0

OR

Total return = Dividend yield + capital gain yield

=(30 - 26 + 1.30)/26

= 20.38%

OR

= 5% +15.38%

= 20.38%

Summary

Palm Tree's

Dividend yield = 5%

Capital gain = 15.38%

Total return = 20.38%