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Unformatted text preview: rent estimates of the dividend yield for the same stock. Some use the dividends paid in
the last financial year, others use dividends paid over the last four quarters and there are
some who use expected dividends per share over the next financial year. If higher dividends
make stocks more attractive investments, stocks with higher dividend yields should generate
higher returns than stocks with lower dividend yields.
Over the last four decades, researchers have tried to examine whether higher
dividend yield stocks are superior investments. The simplest way to test this hypothesis is to
create portfolios of stocks based upon their dividend yields and examine returns on these
portfolios over long periods. In Figure 2.1, the average annual returns – these include price
appreciation and dividend yields – are computed on ten portfolios created based upon
dividend yields at the beginning of every year from 1952 and 2001. Looking at sub-periods,
the highest dividend yield portfolio earned an annual return of about 16% between 1952 and
1971, about 3%...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11