when calculating beta by regressing stock returns vs. market returns, do we have to add back the dividend payments to the stock returns? because just pulling stock returns will give the capital gains component. but i have never seen this done
the reason this makes sense is because the CAPM gives the expected return on equity (including dividends??)
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what about the benchmark(index)? benchmark also has an implicit dividend rate as some of those companies pay dividends which dont appear in the returns. You use returns adjusted for dividends for both of them (index and the stock) to get more accurate results.
Yes, the total return on a stock is equal to the capital gains return added to the dividend return.
As riskorangutan has stated, you will need to use an index that includes dividend returns (adjusted returns) and then regress that against the adjusted individual stock return.
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