Importance of dividend yield in the evaluation of the worth of a share.

Shares should sell at prices which will provide their owners with a reasonable return. 

As an investment, shares have 3 characteristics:

1.  They are relatively illiquid.
2.  The return is uncertain.
3.  A large part of the return is in the form of capital gains.

Even the most inexperienced investor is aware of the last characteristic.

Question:  We should buy shares in accordance with their expected dividend yield (DY).  "If we buy a share for its dividend, why should its price go up so that we can get capital gains?"

Question:  "Why should the price of a share, any share for that matter, go up in the first place?"

 

Here are some reasons for share not to go up:

Share price should not go up as a result of reorganization.
Share price should not go up as a result of share split or bonus.
Share price should not go up as a result of property injection.
Share price should not go up as a result of rights issues.

There is only one good reason why a share's price should go up in the first place:

If one accepts the dividend yield approach to share valuation, the only reason why the price of a share should increase is that the share 

• now pays a higher dividend than before or  
• has the prospect of paying a higher dividend. 

In other words, the price (or more accurately, the intrinsic value) of a share is related to its dividend. 

• That is, the intrinsic value tends to be a constant multiple (i.e. so many times) of the dividend. 
• "How many times?" - this is a very complex subject which will be looked at later.