Dividend Yield for Valuing Equity

• Payments are a key component of a stock's total return.
• Can be expected with greater certainty than stock price appreciation.

• Dividend Yield drawbacks:

• Dividend yield fails to reflect share price appreciation when evaluating a stock's total return potential.

• Dividends paid in the current period reduce a company's capital available to invest in future growth.

• The tradeoff between dividends and capital gains can be difficult to evaluate.

• Not all companies pay dividends.

• Justifiable Dividend Yield breakdown:

Div0/P0 = (rce - Growth rate of dividend payment) / (1 + g)

• The yield has a negative relationship with the dividend growth rate.
• The yield is positively related to the required return on common equity.