Capital Gains versus Income Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 8.5 percent, 0 percent, and −5 percent per year, respectively.

Stock Z is a growth stock that will increase its dividend by 30 percent for the next two years and then maintain a constant 8 percent growth rate thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.