If a company pays $4.90 dividend at the end of the year, and the stock price is $80, and the growth rate is 6%. How could you increase the dividend yield? If a company has constant 5% increase in dividend payouts each year and no increase in the growth rate is that good business? How can the company meet the required rate of return if the growth rate is flat?
To increase the dividend yield, the company can do the following:
1. Increase dividend payments: The company can increase the absolute amount of dividends paid out to shareholders. This can be achieved by either increasing the dividend per share or increasing the total number of shares bought back by the company, thereby reducing the number of shares outstanding.
2. Decrease stock price: Another way to increase the dividend yield is by decreasing the stock price. If the stock price decreases while the dividends remain the same, the dividend yield will increase. However, it is important to note that a decreasing stock price may indicate poor market performance and may not be desired by shareholders.
Regarding the second question, a constant 5% increase in dividend payouts each year without an increase in the growth rate may not necessarily be considered as good business. While increasing dividends consistently can be a positive signal to investors, it is important to evaluate the overall financial health and growth prospects of the company. If the dividend growth rate consistently outpaces the growth rate of earnings or the company's ability to generate cash flow, it can lead to unsustainable dividend payouts.
If the growth rate is flat (no increase), the company can still meet the required rate of return by focusing on other components of the required rate of return equation, such as the dividend yield or the stock price growth. For example, the company can increase the dividend yield (by paying higher dividends or decreasing the stock price) to compensate for the lack of growth rate. Alternatively, the company can focus on providing consistent and stable dividends to attract income-focused investors who prioritize steady income over high growth potential. Ultimately, it depends on the specific circumstances of the company and the preferences of its shareholders.