Sunday, 30 April 2017

Return on Share Investment = Dividend Yield + Growth over Time (Gordon Growth Model)

Rearranging the Dividend Discount Model (DDM) formula:

PV = D1 / (k-g)

= (D1/PV) + g
   = Dividend yield + growth over time.

This expression for the cost of equity (required rate of return) tells us that the return on an equity investment has two components:

  • The dividend yield (D1/PV at year 0)
  • Growth over time (g)

Return on share investment = Dividend Yield + Growth over Time:

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