Dividend Growth Rate: Definition & How To Calculate | My Espresso

Everything You Need to Know About Dividend Growth Rate

Before you commence making investments in stock markets, you should have a clear understanding of the crucial stock indicators. And the dividend growth rate is one key indicator or measure of stocks. In fact, all publicly listed companies pay dividends to their shareholders in several forms.

Published on 31 January 2023

You should note that the dividends are typically paid out of a company's net profits. And with the dividend growth rate formula, you can also calculate the dividend growth rate in stock markets. Further, this will help you to calculate the long-term returns from all your investments in several stocks. Thus, you will have the capability of making informed decisions.

Keep reading this article until the end to learn how to use the dividend growth rate formula and various other things. Let’s get started.

Dividend Growth Rate - What is it?

Dividend Growth Rate is typically the percentage growth rate of a company’s dividend that is achieved during a certain period. If you are wondering how to calculate the dividend growth rate, then you must calculate it annually. However, if required, you can also calculate it quarterly or monthly.

You should note that the dividend growth rate is an immensely crucial metric for determining a company's long-term profitability. You can seamlessly assess and analyse the ability to sustain its profitability as the dividends are distributed from the company's earnings. This can basically be done by comparing the dividend growth rate over time.

Using Dividend Growth Rate for Security Pricing

Remember that the dividend growth rate can be efficiently used in a security’s pricing. It is particularly an essential variable in the Dividend Discount Model. Also, note that the dividend discount model is entirely based on the company's current stock price. In fact, it is equivalent to the future dividends of the company.

However, the dividend discount model is represented with this equation:

P0 = D1 / r - g

• Here, P0 is the current stock price of the company
• D1 is the dividends of the following year
• r is the cost of equity of the company
• g is the absolute growth rate of the dividend

Formula for Calculating the Dividend Growth Rate

The dividend growth formula can be classified into two distinctions. One is by using arithmetic means, and the other is by using compounded growth. Let’s take a look at each of them one at a time.

●       Using Arithmetic Mean

Dividend Growth Rate = (G1 + G2 + …….. + Gn) / n

Here, Gi is the dividend growth in the year, and n is regarded as the number of periods.

●       Using Compounded Growth

The compounded growth rate method can calculate the dividend growth rate. It is typically done by using the initial and final dividend and the number of periods between the dividends.

Dividend Growth Rate = (Dn / D0) 1/n – 1

Here, Dn is the final dividend, D0 is the initial dividend, and n is the total number of periods.

In other words, the dividend growth rate formula can be derived by dividing the sum of historical dividend growth by the total number of periods.

Calculating the Dividend Growth Rate

The easiest way to calculate the dividend growth rate is to search and determine the growth rates for distributed dividends. However, when you know the dividend growth rate formula and apply it to calculate the same, things become a lot easier. The formula for DGR is:

Dividend Growth Rate = D2 / D1 - 1

Nonetheless, it’s important to come up with a forward-looking or advanced growth rate in certain cases. It is specifically applicable while determining the dividend discount model's dividend growth rate. In fact, an investor can also calculate the dividend growth rate by taking an average or geometric valuation for greater precision.

Please note that there are a few benefits associated with determining dividend growth rates:

• Assessing the earnings from stocks
• Determining the intrinsic value of stocks
• The freedom to calculate the dividend growth rate for any period, etc.

To Conclude

As an investor, it is imperative to clearly understand the concept of the dividend growth rate in stock markets. Apart from that, it’s immensely crucial to select a trusted and reliable financial partner. Nevertheless, as you need to keep track of the dividend growth rate, you should be familiar with the dividend growth rate formula. This will surely provide you with multiple benefits.

Team Espresso

We care that you succeed

Bringing readers the latest happenings from the world of Trading and Investments specifically and Finance in general.