dividend yield

CFA Level II Equities
#1
  • Given an equity risk premium of 3.5%, a forecasted dividend yield of 2.5% on the market index and a U.S. government bond yield of 4.5%, what is the consensus long-term earnings growth estimate? 3.5% - 2.5% + 4.5% = 5.5%
  • Recent surveys of analysts report long-term earnings growth estimates as 5.5% and a forecasted dividend yield of 2.0% on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8%. According to the Gordon growth model, what is the equity risk premium…= 2.0% + 5.5% - 4.8% = 2.7
  • In 2 examples above, why does the dividend yield get subtracted in the growth calcultion but added in the risk premium calc? If we project a higher dividend yield, doesn’t that indicate higher growth, all else equal? (Higher dividend and low price=room to grow right?) And then on the flip side, why does a high dividend yield indicate a high risk premium?
#2

It’s just algebra:

Bond yield + ERP = Total growth = Earnings growth + Dividend yield

ERP = Earnings growth + Dividend yield − Bond yield

Earnings growth = bond yield + ERP − Dividend yield

#3

Thanks!

#4

You’re welcome.