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CFA Level I · CFA Level I Exam · Sources of Equity Returns

Compared with a company that retains all earnings, a company that raises its dividend payout ratio, all else equal, will most likely deliver to shareholders:

A higher payout ratio most likely shifts total return toward dividend yield. More cash is paid to shareholders as income, while less is retained to fund growth, which tends to reduce price appreciation. Total return is not necessarily lower, as the split between components changes.

  1. Aa larger share of total return from dividend yieldCorrect
  2. Ba lower price return and a lower total return
  3. Ca higher price return from retained earnings growth

Explanation

Paying out more earnings raises the dividend yield component of total return. Less is retained for reinvestment, so price appreciation tends to be lower, not higher. Total return need not fall, because the components shift rather than shrink by definition.

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