Capital Gains versus Income Consider four different stocks, all of which have a required return of 15
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Capital Gains versus Income Consider four different stocks, all of which have a required return of 15 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant rates in dividends for the foreseeable future of 10 percent, 0 percent, and 5 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 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.
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