Dividends And Stock Valuation: A Study From The Nineteenth To The Twenty-First Century

ADVERTISEMENT

Dividends and Stock Valuation:
A Study From the Nineteenth to the Twenty-First Century
The study considers how economic factors influence the values of stocks by investigating how
changing economic conditions have impacted the relationship between the dividends paid by firms in
the Standard & Poors Composite Index and the overall value of the Index. The study reviews the S&P
data for the 1871 to 2003 period.
The study determines the equity values which would be expected from anticipated future dividend
payments and compares these values to the actual values of the index over time. The analysis
attempts to give an understanding of how investors value firms by focusing on the role of dividends
on value and how this role changes as economic conditions change.
The expected equity values are calculated using two dividend based valuation methods, the dividend
discount model and the Gordon Growth Model. The dividend discount model values stocks by
determining the present value of anticipated future dividends. The Gordon Growth model is a
variation of the dividend discount model.
The study finds that the dividend-based valuation models perform relatively well at explaining the
actual historical prices for the S&P Composite index over time. Where there are variations they
apparently relate to changing economic conditions. The study demonstrates empirically the
conclusion that in periods of economic expansion equity purchasers require a lower rate of return,
and therefore a lower cost of equity, than they do in a period of contraction. Another finding is that,
since the 1945, capital gains have taken over a higher percentage of the total return from stocks
which is offset by a declining dividend return component.

ADVERTISEMENT

00 votes

Related Articles

Related forms

Related Categories

Parent category: Business