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CFA® Level I · Equities · free lesson
Sources of Equity Returns
Equity investors earn returns from two sources: cash distributed by the company and changes in the share price. This module explains how companies distribute cash through dividends and buybacks, why splits and reverse splits change the price but not the value of a holding, which dates decide who receives a dividend, and how to compute price and total returns, including across periods and currencies.
What you will learn
1. Describe the forms and uses of cash dividends and share repurchases, and calculate their effects on earnings per share and book value per share.
- Regular dividends signal sustainable earnings; special dividends are one-off.
- Repurchase methods: open market, fixed-price tender, Dutch auction, direct negotiation.
- A buyback raises EPS only if the after-tax cost of funds is below the earnings yield (E/P).
- Buying back shares above book value per share lowers BVPS; below book value raises it.
- Equal-sized dividends and buybacks leave shareholder wealth unchanged before taxes and signaling.
2. Describe the features and uses of stock splits, reverse stock splits and stock dividends, and calculate their effects on share price and share count.
- Splits, reverse splits and stock dividends change the share count and price but not market value or ownership.
- In an n-for-1 split, shares multiply by n and price divides by n; a reverse split does the opposite.
- Per-share data and historical prices are restated for comparability.
- Splits keep prices accessible and often follow strong performance.
- Reverse splits help meet minimum-price rules but are often read as a distress signal.
3. Describe the sequence of dates in a dividend payment and explain how the settlement cycle determines the ex-dividend date and the share price adjustment.
- Order: declaration date, ex-dividend date, holder-of-record date, payment date.
- Buyers on or after the ex-dividend date do not receive the dividend.
- T+2: ex-date is one business day before the record date. T+1: ex-date equals the record date.
- The share price should fall by about the dividend amount on the ex-date.
- Count business days, not calendar days, when working back from the record date.
4. Calculate and interpret the price return and total return of an equity investment over one or more periods, including the effects of dividend reinvestment and currency movements.
- Total return = price return + dividend yield, both measured on the beginning price.
- Multi-period total return compounds growth factors, which assumes dividend reinvestment.
- Price indexes ignore dividends; total return indexes reinvest them; net versions deduct withholding tax.
- Fund performance should be compared with a total return benchmark.
- Home-currency return = (1 + local return)(1 + currency return) - 1.
Module at a glance
- Cash goes back to shareholders through regular or special dividends and share repurchases.
- A buyback raises EPS only if the after-tax cost of funds is below the earnings yield; buying above book lowers BVPS.
- Splits, reverse splits and stock dividends change per-share figures, not value.
- Dividend dates: declaration, ex-dividend, record, payment; under T+1 the ex-date equals the record date.
- On the ex-date the price drops by roughly the dividend.
- Total return = (P1 - P0 + D) / P0; compound period returns to link them.
- Home-currency return = (1 + local)(1 + FX) - 1; compare funds with total return benchmarks.
This free module has 4 lessons, 12 practice questions with full explanations.