Measures of Dividend Policy

We generally measure the dividends paid by a firm using one of two measures. The first is the dividend yield, which relates the dividend paid to the price of the stock:

Dividend Yield = Annual Dividends per share / Price per share The dividend yield is significant because it provides a measure of that component of the total return that comes from dividends, with the balance coming from price appreciation.

Expected Return on Stock = Dividend Yield + Price Appreciation Some investors also use the dividend yield as a measure of risk and as an investment screen, i.e., they invest in stocks with high dividend yields. Studies indicate that stocks with high dividend yields earn excess returns, after adjusting for market performance and risk.

Figure 10.2 tracks dividend yields on the 2700 listed stocks in the United States that paid

Dividend Yield: This is the dollar dividend per share divided by the current price per share.

dividends on the major exchanges in January 2004. Note, though, that 4800 firms out of the total sample of 7500 firms did not pay dividends. Strictly speaking, the median dividend yield for a stock in the United States is zero.

Drinking The Table

a Estimated using Value Line data on companies in January 2004

The median dividend yield among dividend paying stocks is 1.80%, and the average dividend yield of 2/12% is low by historical standards, as evidenced by Figure 10.3, which plots average dividend yields by year from 1960 to 2003.

Figure 10.3: Dividend Yield for U.S. stocks - 1960 - 2003
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