Topic_07_E1 - dividends. While the S&P 500...

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Topic 7, Exercise 1 Dividends and Investment Returns The year-end issue of BusinessWeek presents a special report entitled, Where to Invest – Strategies for Stocks and Bonds . Pay close attention to one part of this report: “Dividends: Some Races Are Not to the Swift.” You will also want to view the table, “Income vs. Growth Stocks.” After reading this article, answer the following questions: 1. Why were dividend-paying stocks not as favorable from 1995 to 2000? In the years from 1995 through 2000, share prices of common stock rose at 20% per year. In such an environment, the dividend component of total return was viewed as unimportant. 2. Why might dividends be considered more important in the current interest rate environment? With interest rates at 50-year lows in 2002 and the value of common stock down appreciably from their 2000 highs, investors have reexamined the importance of
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Unformatted text preview: dividends. While the S&P 500 Index had lost 15% in 2001, high dividend-paying companies have yielded positive returns. The dividend yield on many common stocks is higher that the interest rate offered on short term securities. These securities also offer the potential of return in positive gains. 3. What does the comparison of the high dividend-paying stock (J.P. Morgan Chase & Co.) and the high-growth stock (Tyco International Ltd.) reveal? The comparison of J.P. Morgan and Tyco shows that companies that pay higher level of dividends with lower rates of growth can offer similar longer rates of returns. The key is dividend reinvestment. The total return offered by J.P. Morgan matches the return of Tyco in 5 years. The return is matched through the reinvestment of dividends paid....
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This note was uploaded on 09/13/2011 for the course FIN 6301 taught by Professor El-asmawanti during the Fall '09 term at University of Texas at Dallas, Richardson.

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