Question

The next dividend payment by Hoffman, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. Assume the stock currently sells for $43.15 per share. What is the dividend yield? What is the expected capital gains yield? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Dividend yield = D₁ / P₀

Dividend yield = $2.65 / $43.15

Dividend yield = 0.0614, or 6.14%

The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate, so:

Capital gains yield = 4.5%