How to Calculate Dividend Yield and Capital Gains Yield

What is the formula to calculate dividend yield and capital gains yield?

Is there a method to determine the expected annual dividend payment and required rate of return?

Calculation of Dividend Yield and Capital Gains Yield

In order to calculate the dividend yield and capital gains yield, we can use the Dividend Discount Model (DDM) formula. The formula is:

P = D / (r - g)

Where:

P is the current stock price,

D is the expected dividend payment,

r is the required rate of return, and

g is the expected dividend growth rate.

Explanation of Calculation

Let's take an example with the data provided: The next dividend payment by IM, Inc. will be $1.87 per share, and the dividends are anticipated to maintain a growth rate of 4.3 percent forever. The current stock price is $37 per share.

First, we calculate the expected annual dividend payment by multiplying the next dividend payment by the growth rate: $1.87 x (1 + 0.043) = $1.95 per share.

Next, we can calculate the dividend yield by dividing the expected annual dividend payment by the current stock price: $1.95 / $37 = 0.0527 or 5.27%.

For the expected capital gains yield, we subtract the dividend yield from the total required rate of return. Assuming a total required rate of return of 10%, the calculation would be: 10% - 5.27% = 4.73%.

Therefore, the dividend yield is 5.27% and the expected capital gains yield is 4.73%. These calculations help investors understand the potential returns from holding a stock in terms of dividends and capital gains.