What is implication of the dividend yield on the stock valuation?

Question

I want to know the implication of the dividend yield on the stock valuation.. I am not able to found out the concreate answer ...please help me out...

Answer 1

In the long run, dividend yield has almost no bearing on the valuation of the stock. The stock's value is the discounted present value of its future free cash flows. If the cash dividend were kept in the company, it could be used to presumably generate more future value for the corporation.

In the short run, a cash dividend will reduce the value of the stock by some amount (not always the value of the cash dividend) once it goes ex-dividend. This is due to the payout of the cash taking out the potential for that cash to be invested into projects that can provide future value for the corp. Which was "priced" into the stock prior to the ex-dividend date and those investors expected to get the cash from holding the stock before ex-dividend.

The primary usage of dividend yield (and hence dividends) is for corporations to attract investors with desirable characteristics, in their eyes. By paying stable, increasing cash dividends a company signals to the market that it is stable and increasing value for shareholders regardless of the stock price going up or down and changes in accounting accruals.

Also the dividend yield will possibly attract long-term investors because of the predictability of the dividends make it comparable to coupon payments from a bond. And that may attract a wider range of investors who only invested in bonds.

Answer 2

You have a good question. The answer is little complicated though if you try to understand carefully you might make sense out of it. A company is supposed to ethicaly give it's shareholders return for the risk they take in holding their shares. Dividend yield should be equal to, understand carefully now, standard deviation of fifteen year's earnings. Every company is supposed to maintain their earings but howmuchever they try there will be volatility in it. It is this volatility that is personified as standard deviation of the earnings for 15 years and companies are bound to give this as dividend. Hopefully carefull study on this will reveal the truth if you haven't understood it carefully. In fact it is used in option pricing model by Black and Scholes in the d1 calculation whic is d1=Natural log of Ps/Px + t(krf + del^2/2) where del^2/2 is the surrogate for the dividend yield. The other krf is the capital gains yield. This is one are in finance where this theory is visible and this alone is sufficient for it to win the Nobel prize for being so profound in ethics and theory.

Answer 3

16% because the most important note is "implicit". easily the boom fee is calculated as g = ROE x plowback ratio. you do not have ROE nor plowback, so implicitly, that is 16%, which contained in the real international does no longer exist.