Question

historically, price appreciation, or capital gains yeils has accounted for a greater portion of returns on common stocks than divideny payments. Critically analyse this statement using illustrations.

Answer 1

Answer to the above question:-

Both the terms returns on common stock and dividend yield is used to describe the performance of the stock over a certain time period (i.e. usually one year) but they reflect different types of performance. Each measurement has a relative importance that depends on individual circumstances and investment horizon.

If one care only about identifying which stocks have performed better over a period of time, the concept of return on common stock is more important than dividend payments.

But if one is relying on his investment to provide a consistent income, the dividend is more important.

However, if one have a long term investment horizon and plan on holding a portfolio for a long time, he must focus on total return on common stock.

The statement, "Historically, price appreciation, on capital gains yeild has accounted for a greater portion of returns on common stocks than dividend payments". It is so because the dividend yield takes only in account the actual cash dividends but the return on common stock takes into account interest, dividends, and increase in share price among other capital gains. Therefore, capital gain yields accounts for a greater portion of returns on common stock than dividend payments.