Question

Suppose we observe a stock selling at $40 per share. The next dividend will be $1 per share, and you think the dividend will grow at 12 percent per year forever. What is the dividend yield in this case? The capital gains yield?

Answer 1

Selling Price of stock = $40 per share

Next dividend = $1 per share

Dividend yield is calculated by dividing the dividend by the stock price.

So, Dividend yield = Dividend / price of stock

= $1 / $40

= 0.025 or 2.5%

So, dividend yield is 2.5%

Now, capital gain yield is the percentage increase in price of stock . In case of Gordon's growth model ,where the growth rate is constant forever, then capital gain yield is equal to the growth rate.

So, capital gain yield = growth rate = 12%