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CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches

An analyst compares companies using the dividend yield as a valuation indicator. A company with a higher dividend yield than its peers is most likely to be:

A higher dividend yield means a larger portion of the investor's expected return comes as current income relative to price, other things equal. It does not guarantee higher total return, since price changes and dividend sustainability also matter, and a zero-dividend company has no yield at all.

  1. AMore attractively valued only if it pays no dividends
  2. BOffering a larger share of its return through current income, other things equalCorrect
  3. CCertain to have higher total returns than peers

Explanation

Dividend yield is dividends per share divided by price, so a higher yield means more of the return comes from current income, other things equal. It does not guarantee higher total returns because price changes and dividend sustainability matter. A company paying no dividends has a zero yield, so the first option is illogical.

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