Final answer:
Dividend yield is derived by dividing the annual dividends by the stock's price per share. Investors use this metric, along with expected dividends, to ascertain the present value of future cash flows from stock. The S&P 500 index demonstrates the shift in investment returns from dividend-heavy in the early decades to capital gains-focused in later years.
Step-by-step explanation:
The dividend yield on a stock is calculated by dividing the annual dividends per share by the stock's price per share. For instance, consider Babble, Inc., a company selling 200 shares and expected to pay out sizable dividends before disbanding in two years. An investor would be interested in knowing the future dividends to determine what they would pay for a share today. The underlying principle here is to find the present value of the future cash flows (dividends) that an investor expects to receive from the stock.
The example of the evolution of dividends and capital gains from the 1950s till the 2020s, as illustrated using the S&P 500 index, shows how the investment environment and returns can change over time. In the earlier decades, dividends were a significant part of the total return, but later, capital gains took over as the dominant source of investor profits.