You buy a share at $50, hold it one year, collect a $2 dividend, and sell at $54. Your price return is 8%, your total return is 12%. The gap between those two numbers is what this lesson is about, plus the corporate actions that move them.
Dividends. A dividend is a distribution of company assets (usually cash) to shareholders. The board declares it; shareholders do not vote. Three forms appear on the exam:
- Cash dividend. Most common. Paid quarterly by most large U.S. companies. Reduces retained earnings and cash on the balance sheet.
- Stock dividend. Additional shares distributed pro rata. A 10% stock dividend gives every holder of 100 shares 10 more shares.
- Special (extra) dividend. A one-time payment, often after a windfall (asset sale, strong cyclical year). Signals the company does not expect to sustain the higher payout.
KEY: A stock dividend does not change shareholder wealth. If you own 1% of the company before the dividend, you own 1% after.
Common mistakes
- Treating stock splits as wealth-creating events. A 2-for-1 split doubles shares and halves price. Total value is unchanged. Trap: candidates "compute" a return from the split itself and arrive at 100%. Splits create no return.
- Confusing ex-date and record date for entitlement. The ex-dividend date is the cutoff, not the record date. Buying on the ex-date itself means you do NOT receive the dividend.
- Forgetting dividends in total return. Price return alone understates performance. If a question gives ending price and dividends but asks for "return on the equity investment," assume total return unless price return is explicitly specified. Trap: $45 to $48.60 with $1.60 dividends, candidate answers 8.00% (price return) when the correct total is 11.56%.
Bottom line
- Total return = price return + dividend yield, always. Price return alone ignores cash distributions; total return includes them.
- Dividend dates in order: declaration, ex-dividend, holder-of-record, payment. The ex-date is the entitlement cutoff, one business day before the record date.
- Cash dividends and equal-dollar share repurchases produce identical shareholder wealth in a perfect market; they differ on taxes, signaling, and EPS optics, not fundamental value.
- Stock splits and stock dividends change share count and price proportionally but do NOT change wealth, ownership percentage, or fundamental value.
Exam shortcut
For total return, the shortcut is price change plus dividends, all over the entry price. Never compute price return and forget to add dividend yield. For dividend chronology, memorize D-E-R-P (Declaration, Ex-date, Record, Payment) and remember the ex-date is the cutoff. For splits and reverse splits, the wealth answer is zero; recompute share count and price per share, then verify total market value is unchanged.
The full lesson (about 2,033 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- sources of equity returns
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