Part 1. A stock is selling today for $40 per share. At the end of the year, it pays a dividend of $2 per share and sells for $44. What is the total rate of return on the stock? What are the dividend yield and capital gains yield?
Part 2. Suppose the year-end stock price after the dividend is paid is $36. What are the dividend yeild and capital gains yield in this case? Why is the dividend yield not affected?
Part 1: (Total return= (dividend+appreciation)/(initial value) = (2 + 4)/40 = 15% 5% is dividen yield and the rest (10%) is capital gains yield.
Part 2.: Dividend yield = 2/40 = 5%, again, because the same dividend gets divided by the same initial stock value. Capital gains yield = -4/40 = -10%