Expected Dividend Growth Rate Calculator
Estimate future dividend increases using the Fundamental Growth Method (Retention Ratio × ROE).
What is the Expected Dividend Growth Rate?
The expected dividend growth rate is a forecast of how much a company's dividend payment per share is likely to increase over a specific period. For long-term dividend growth investors, this metric is critical because it helps determine the "yield on cost" and the total return potential of an equity investment.
While historical growth rates are useful, the Fundamental Growth Method (also known as the Sustainable Growth Rate) provides a more accurate forward-looking estimate by looking at how much profit a company reinvests and how efficiently it generates profit from its equity.
The Formula: How to Calculate Expected Growth
To calculate the expected dividend growth rate (g), we use the following relationship:
- Retention Ratio (b): The percentage of net income kept by the company after paying dividends. Formula: (Net Income – Dividends) / Net Income.
- Return on Equity (ROE): A measure of financial performance calculated by dividing net income by shareholders' equity. Formula: Net Income / Shareholders' Equity.
Why Reinvestment Matters
If a company pays out 100% of its earnings as dividends, its retention ratio is 0%. Without reinvesting capital back into the business to buy new equipment, fund R&D, or acquire competitors, the company has no internal fuel for growth. Conversely, a company that retains a portion of its earnings and generates a high ROE on that retained capital is positioned to grow its earnings—and eventually its dividends—at a faster pace.
Real-World Example
Company: BlueChip Corp
- Net Income: $1,000,000
- Dividends Paid: $400,000
- Shareholders' Equity: $5,000,000
Step 1: Calculate Retention Ratio. ($1M – $0.4M) / $1M = 0.60 (60%)
Step 2: Calculate ROE. $1M / $5M = 0.20 (20%)
Step 3: Calculate Growth. 0.60 × 0.20 = 0.12 or 12%
In this scenario, BlueChip Corp has an expected dividend growth rate of 12% per year.
Limitations of this Model
While the Fundamental Growth Method is powerful, it assumes that the company's ROE and payout ratio will remain constant. In reality, these figures fluctuate based on economic cycles, competition, and management decisions. Investors should also check the "Historical Dividend Growth" (CAGR) over the last 5-10 years to see if the theoretical growth matches the company's actual track record.