If a company pays $4.90 dividend at the end of the year, and the stock price is $70, and the growth rate is 6% can you tell me what the required rate of return would be using the dividend yield and growth rate (capital gains)?
The REQUIRED rate is an arbitrary quantity, and depends upon the long term track record and business prospects of the company, as well as current bond market yields. In a word, it depends upon investor sentiment.
You have quoted ACTUAL stock performance data. It indicates that the current total return (dividends plus capital gain) is 6% + 4.90/70 = 13%
To calculate the required rate of return using the dividend yield and growth rate, we need to determine the components of the equation:
1. Dividend Yield: The dividend yield is calculated by dividing the annual dividend by the stock price. In this case, the annual dividend is $4.90 (given in the question) and the stock price is $70. So, the dividend yield would be:
Dividend Yield = Annual Dividend / Stock Price
= $4.90 / $70
= 0.07 or 7%
2. Growth Rate: The growth rate represents the rate at which the dividend is expected to grow over time. In this case, the growth rate is given as 6%.
Now, we can calculate the required rate of return using the dividend yield and growth rate formula:
Required Rate of Return = Dividend Yield + Growth Rate
= 0.07 + 0.06
= 0.13 or 13%
Therefore, the required rate of return using the dividend yield and growth rate is 13%.