Skip to content

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

An analyst compares two utilities using dividend yield. Company X has a trailing dividend yield of 5.2% and Company Y has 2.1%. Both have similar risk. Which conclusion is most likely appropriate?

A higher dividend yield means a company pays more cash dividends relative to its price, but it reveals nothing about growth or price appreciation. Total return includes both, so the higher yield alone does not prove higher total return or undervaluation.

  1. ACompany X will necessarily generate a higher total return than Company Y.
  2. BCompany X distributes a larger share of its price as cash dividends, but its yield alone says nothing about growth.Correct
  3. CCompany X is undervalued relative to Company Y.

Explanation

Dividend yield is dividends per share divided by price, so it measures only the income component of return. Total return also includes price appreciation, which depends on growth. Therefore a higher yield does not imply higher total return or undervaluation.

Did you get it right without looking?

One question tells you little. A timed set on Relative Value Equity Valuation Approaches shows your real accuracy, how long you take and where you lose marks.

Practise Relative Value Equity Valuation ApproachesFree diagnostic mock

More Relative Value Equity Valuation Approaches questions