Grateful Eight Co. is expected to maintain a constant 3.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock?

Grateful Eight Co. is expected to maintain a constant 3.8 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock?

Answer

The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is:

R = Dividend yield + Capital gains yield

R = .056 + .038

R = .0940, or 9.40%