2.3 Calculate the expected return on a share III
View the video to see the third in a series of three worked examples showing how to calculate the expected return on a share.
Transcript: Calculating expected return part 3
D plc has a dividend yield, based on this year’s total dividend, of 5 per cent. Given that the forecast growth rate of the dividend yield for D plc is 3 per cent, what is the expected return for a shareholder?
Let’s use the Gordon Growth variation of the dividend valuation model which is rearranged to find the expected return, whereby the expected return on a share (E(Ri)) is equal to the expected dividend next year (D1), divided by the current price of the share (Pi) plus the growth rate of dividends (g) from investing in the share.
D1 divided by Pi is the dividend yield of 5 per cent
So take 0.05 or 5 per cent which is the dividend yield and multiply by 1 plus the growth rate, 3 per cent. This will give the dividend yield for next year.
Then we need to add the growth rate of 0.03 to the dividend yield for next year.
Therefore, the expected return for a shareholder in D plc is 0.0815 or 8.15 per cent.