Dividend yield

Superficially, Hafslund became a dividend-yielding share the company was reorganized in 1927 and 1928 so as to yield a constant yearly dividend of 5 per cent of... 

Yield advantage = Current yield — Dividend yield... 

Let us now consider the following example. ABC pic has issued a 5-year convertible bond with a market price of 112.2 and an underlying share with a market price of 0.65. The bond has also a coupon of 5.5%, while the dividend yield of the underlying stock is 2%. If an investor buys just 1 00 and the bond may be converted into 1 51.7 shares, the premium over a direct purchase of the ordinary shares expressed in basis points is equal to (112.2 - 98.6) or 1 3.6 per bond, in which 98.6 is obtained by multiplying the conversion ratio of 151.7 by the current stock price of 0.65. The compensation for this premium is the cash flow differential between the convertible and underlying shares, which is calculated as ( 1 00 x 5.5%) -(98.6 x 2%) or 3.5. The payback period measure is 13.6/3.5 or 3.86 years and the concept is similar to payback period used in corporate finance analysis. 

In 1973, Myron Scholes and Fisher Black developed a model known as B S model for valuing options. Like the binomial tree, in the B S model the option value depends mainly on the price of the underlying asset, volatility, interest rate, time to expiration and dividend yield. Because in this chapter, we propose the value of a cOTivertible as the sum of the straight bond and call option, the... 

In the example shown in Section 9.3.1, we consider an underlying asset that does not pay dividends. We suppose now a stock that pays 1% of dividends in years 1, 2, 3, 4 and 5 in terms of dividend yield. As explained before, the introduction of dividends decreases the stock price tree. Therefore, at the end of the binomial tree, the stock price will be lower. For instance, as shown in Figure 9.26, the highest stock price tree without the inclusion of dividends is 11.51. 

Differently, including dividends with a dividend yield of 1%, the highest stock price at year 5 is 10.95 (Figure 9.27). 

With a dividend yield of 1%, the value of a convertible bond decreases from 107.5 to 105.2. This lower value is due to the lower stock price tree and value of conversion option (Figure 9.28). 

On this basis, there is a huge urge to say you can t do it, but we must try to offer something a little more constructive. Nobody ever asks what the duration of an equity is, but the question is almost equivalent—linkers, like equities, are a different asset class. There are equity duration measurements—price sensitivities with respect to changes in the earnings yield or dividend yield—and equities can be related to nominal bonds via a Fisher equation as we have shown, just as linkers are related to nominals via a Fisher equation. However, equity duration numbers are seldom calculated, and would never be used in a mixed portfolio of equities and bonds to give a total portfolio duration. 

The dividend yield gap = Break-even future real dividend growth... 

Exhibit 8.11 charts the dividend yield gap for the European markets with inflation-linked bond sectors. 

EXHBIT 8.11 Long Inflation-Linked Bond Real Yields Less Equity Dividend Yields (%)... 

It is certainly fair to use earnings, since those earnings do accrue to the owners of the company—the shareholders—even if they are not paid out to them. However, the earnings yield is almost always much higher than the dividend yield, because some earnings are retained, so how can both the dividend and the earnings relationship be true We can square this circle, if it is accepted that shareholders forfeit dividends today. 

The assumption, for stock options, of a constant dividend yield. 

First Payment yearl as lump sum, 12% dividend yield 43.37 First Payment yearl as lump sum, 12% dividend yield... 

The bond itself may be analyzed—in the first instance— as a conventional fixed-income security, so using its coupon and maturity date we may calculate a current yield (running yield) and yield-to-maturity. The yield advantage is the difference between the current yield and the dividend yield of the underlying share, given by (13 3). 

P, is the price of the convertible bond is the price of the underlying equity C is the bond coupon r is the risk-free interest rate N is the time to maturity a is the annualized share price volatility c is the call option feature rd is the dividend yield on the underlying share... 

Dividend yield = Cash dividends per share/Market price per share = 2.24/ 85 = 2.64%... 

Investors hold stock in companies because they are interested in a return on their investment. The return could come from dividends paid to the stockholder or from appreciation in the market value of the stock. Dividend yield is the ratio of the dividend paid per common share to the market price per common share. This gives investors some idea of the rate of return they will receive in cash dividends from their investment. Low dividend yield companies generally keep a large portion of net income funding growth and expansion. Many well-known high tech companies do not pay dividends for this very reason to fund growth and e q)ansion. 

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