Dividend Yield

Dividend yield is a stock's annual dividend divided by its share price. It shows the cash return an investor gets from dividends alone. In the dividend growth model, the forward dividend yield plus expected growth equals the cost of equity.

A $50 stock with a $2.00 dividend has a trailing yield of 4%. For cost of equity, use the forward yield based on next year's dividend. At 4% growth that dividend is $2.08, giving a 4.16% forward yield and an 8.16% cost of equity in the Gordon growth model.

Yield moves opposite the price. If the stock falls to $40 with the same dividend, the forward yield rises to 5.2% and the implied cost of equity to 9.2%. A falling price is one thing that increases cost of equity under this method. The dividend growth model guide and the dividend discount model entry have more.