A stock currently trading at $50 expects to pay a $4.50 dividend this year. The dividends and stock price has been growing at 8% per year for 10 years. What is the expected total return on the stock this year?

Question

Quizplus · Accepted Answer

The expected total return on the stock this year is the sum of the dividend yield and the expected capital gains yield. The dividend yield is the dividend per share divided by the stock price, which is $4.50/$50 = 9%. The expected capital gains yield is the expected growth rate of the stock price, which is 8%. Therefore, the expected total return on the stock this year is 9% + 8% = 17%.

A Stock Currently Trading at $50 Expects to Pay a $4.50