Estimate the premium equities offer over bonds, from dividend yield and expected growth.
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.
Equity Risk Premium
Expected equity return = dividend yield + buyback yield + growth; premium = that less the bond yield
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.
The equity risk premium drives every discount rate and asset allocation decision, and it is materially lower when valuations are high.
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.