Equity Risk Premium Calculator

Estimate the premium equities offer over bonds, from dividend yield and expected growth.

About Equity Risk Premium Calculator

The building-block approach derives expected equity return from cash returned to shareholders plus growth, then subtracts the bond yield. It is forward-looking, unlike a historical average which reflects the past rather than current valuations. The equity risk premium drives every discount rate and asset allocation decision, and it is materially lower when valuations are high.

Formula

Equity Risk Premium

Expected equity return = dividend yield + buyback yield + growth; premium = that less the bond yield

total shareholder yield: Dividends plus net buybacks, both of which return cash
implied premium: Forward-looking rather than measured from history

Worked example

With the default values below, Equity Risk Premium Calculator returns Equity Risk Premium of 4.600%. Change any input above and every figure here is recalculated in your browser.

Inputs used

Market dividend yieldaccepts 0–100 %: 1.8 %
Expected long-run earnings growthaccepts 0–100 %: 5.5 %
Long-term government bond yieldaccepts 0–100 %: 4.2 %
Net buyback yieldaccepts 0–100 %: 1.5 %

Results

Equity Risk Premium: 4.600%
Expected Equity Return: 8.800%
Total Shareholder Yield: 3.300%
Premium Over Bonds: 4.600%
Interpretation: Around the long-run historical average

Step by step

1Values used
2Equity Risk Premium
3Equity Risk Premium= 4.600
4Expected Equity Return= 8.800
5Total Shareholder Yield= 3.300
6Premium Over Bonds= 4.600
7Interpretation= Around the long-run historical average

Assumptions and limits

The result is derived only from the 4 inputs listed above. Anything not among them is not part of the calculation.
In particular, this calculator does not take inflation, tax, fees or charges or compounding frequency into account.
Figures are rounded for display to 3 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Frequently Asked Questions

How is Equity Risk Premium calculated?

Expected equity return = dividend yield + buyback yield + growth; premium = that less the bond yield The building-block approach derives expected equity return from cash returned to shareholders plus growth, then subtracts the bond yield. It is forward-looking, unlike a historical average which reflects the past rather than current valuations.

Why does Equity Risk Premium matter?

The equity risk premium drives every discount rate and asset allocation decision, and it is materially lower when valuations are high.

What values do I need to enter?

This calculator takes 4 inputs: Market dividend yield, Expected long-run earnings growth, Long-term government bond yield, Net buyback yield. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.