Our Years Ago Bling Diamond Inc Paid A Dividend Of 165 Per S
Our Years Ago Bling Diamond Inc Paid A Dividend Of 165 Per Share
our years ago, Bling Diamond, Inc., paid a dividend of $1.65 per share. The company paid a dividend of $2.10 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5% per year. What will the company’s dividend be in seven years?
Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically larger?
Paper For Above instruction
The dividend growth model (DGM) serves as a fundamental tool in valuing stocks by estimating the expected future dividends and the total return investors can anticipate. To address the specific questions regarding Bling Diamond, Inc., we must first analyze the historical dividend data to project future dividends and subsequently interpret the components of total stock return.
Calculating the dividend in seven years
Given the data, we know that the dividend paid yesterday was $2.10. To determine the dividend in seven years, we need to estimate the growth rate over the last four years. Since the problem states that dividends will grow over the next five years at the same rate they grew over the last four years, our initial step involves calculating this growth rate using past dividends.
The dividend four years ago remains undisclosed explicitly; however, since the dividend paid yesterday is $2.10, and the dividend four years ago was $1.65, we can infer the growth rate over the period from $1.65 to $2.10 over four years. The growth rate (g) can be calculated as:
g = [(D₄ / D₀)^(1/4)] - 1
where D₀ = $1.65 and D₄ = $2.10. Substituting the values:
g = [(2.10 / 1.65)^(1/4)] - 1 ≈ (1.2727)^(0.25) - 1 ≈ 1.062 - 1 = 0.062 or 6.2%
Therefore, dividends are expected to grow at approximately 6.2% annually over the next five years. Projecting the dividend in seven years involves applying this growth rate over the intervening years.
First, find the dividend in year 5 (end of five years):
D₅ = D₀ × (1 + g)^5 = 2.10 × (1.062)^5 ≈ 2.10 × 1.347 = $2.83
Since dividends will grow at 5% per year after year five, the dividend in year 7 (end of seven years) is:
D₇ = D₅ × (1 + 0.05)^2 = 2.83 × (1.05)^2 ≈ 2.83 × 1.1025 ≈ $3.12
Thus, the projected dividend in seven years is approximately $3.12 per share.
Two Components of Total Stock Return
According to the dividend growth model, the total return on a stock comprises two main components: dividend yield and capital gains yield. The dividend yield represents the income component derived from dividends relative to the stock price, while the capital gains yield reflects the appreciation in stock value over time.
Mathematically, this can be expressed as:
Total Return = Dividend Yield + Capital Gains Yield
where:
- Dividend Yield = Dividends per share / Price per share
- Capital Gains Yield = Percentage increase in stock price over a period
The total return an investor earns from holding a stock is thus a combination of the income received via dividends and the appreciation in the stock’s market value.
Which component is typically larger?
In most cases, the capital gains component tends to be larger than the dividend yield, especially for growth stocks. Growth-oriented investors primarily benefit from capital appreciation, as companies reinvest earnings to fuel expansion rather than distribute large dividends. Conversely, value stocks or mature companies tend to offer higher dividend yields, with more stable dividend payments but potentially lower capital gains.
The relative size of these components depends on the company's growth strategy, industry, and financial policy. However, historical evidence suggests that capital gains often constitute the larger portion of total returns in equity markets, particularly over the long term (Fama & French, 2002).
Empirical studies have shown that for the broad equity market, total returns are predominantly driven by capital gains rather than dividends, which are a smaller part of the overall return (Dimson, et al., 2013). Nonetheless, dividends play a crucial role, especially for income-focused investors who seek steady cash flow.
Conclusion
In conclusion, the projected dividend for Bling Diamond, Inc., in seven years will be approximately $3.12, considering the historical growth rates and subsequent steady growth assumptions. The dividend growth model illustrates that total stock returns comprise dividend yields and capital gains, with the latter generally being the larger component in most market contexts. Understanding these components aids investors in making informed decisions aligned with their income needs and growth expectations.
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