Fundamentals of Financial Management (Concise 6th Edition)

Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases 449

followed a strict residual policy, it would pay out $60 " $24! $36 million as divi-

dends; hence, its payout ratio would be $36/$60! 0.6! 60%.

If the company’s investment opportunities were average, its capital budget

would be $70 million. This would require $42 million of equity; so dividends

would be $60 " $42! $18 million, for a payout of $18/$60! 30%. Finally, if

Average dividend yields have varied over time, and they vary

considerably in di# erent countries around the world. The

accompanying graph, obtained from a recent study by Elroy

Dimson, Paul Marsh, and Mike Staunton of the London Busi-

ness School, shows how the average dividend yield for 16

di# erent countries has changed over the past century. In

both 1900 and 1950, dividend yields varied from nation to

nation, but the average around the world was about 5%.

However, by 2004, the yield in most countries had declined

signi" cantly and the average had fallen to about 3%. For the

United States, the average dividend yield was 4.3% in 1900,

7.2% in 1950, and 1.7% in 2004. Thus, U.S. stocks went from

having one of the highest yields in 1900 to the second lowest

in 2004.

Source: Elroy Dimson, Paul Marsh, and Mike Staunton, “Forecasting the Market,” London Business School, Working Paper Draft 1, March 10, 2004.

DIVIDEND YIELDS AROUND THE WORLD

1900 1950 2004

(^0) Japan United StatesGermanySwitzerlandCanadaDenmarkSwedenIrelandItaly FranceBelgiumUnited KingdomSouth AfricaNetherlandsAustriaSpain
2
4
6
8
10
Dividend
Yield (%)
Dividend Yields around the World: 1900, 1950, and 2004