Expected Dividend Growth Rate Calculator
This tool helps investors estimate the future growth of a company's dividends. Use the Sustainable Growth method for fundamental analysis based on earnings retention, or the Historical CAGR method to analyze past performance.
Method 1: Sustainable Growth Model
Best for predicting future growth based on company fundamentals.
Method 2: Historical Growth (CAGR)
Best for analyzing past dividend trends over a specific period.
Understanding the Expected Dividend Growth Rate
Dividends are a critical component of total return for many investors. While the current dividend yield tells you what a company pays today, the Expected Dividend Growth Rate estimates how much that payout will increase in the future. A growing dividend not only increases your passive income but also acts as a hedge against inflation.
Method 1: The Sustainable Growth Rate
The most fundamental way to calculate expected dividend growth is by using the Sustainable Growth Rate (SGR) formula. This assumes that a company's growth is driven by the earnings it reinvests back into the business rather than paying out as dividends.
Where:
- g = Expected Dividend Growth Rate.
- ROE (Return on Equity) = Net Income / Shareholder's Equity. This measures how efficiently management uses capital.
- Payout Ratio = The percentage of earnings paid as dividends.
- (1 – Payout Ratio) = The Retention Ratio (b). This represents the percentage of earnings reinvested in the company.
Example: If a company has an ROE of 15% and pays out 40% of its earnings as dividends, it retains 60%. The expected growth rate is 15% × 60% = 9%.
Method 2: Historical Compounded Annual Growth Rate (CAGR)
While the sustainable model looks at fundamentals, the historical method looks at the track record. It calculates the Compounded Annual Growth Rate (CAGR) of dividends over a specific period (e.g., 3, 5, or 10 years).
Consistency is key here. A company with a volatile dividend history might show a high CAGR due to a single large hike, which might not be sustainable. Investors often compare the Sustainable Growth Rate with the Historical CAGR to see if the company's current fundamentals support its historical pace.
Why Dividend Growth Matters
Small differences in growth rates have massive compounding effects over time. This is especially relevant for the Dividend Discount Model (Gordon Growth Model), used to value stocks:
Intrinsic Value = D1 / (r – g)
Where D1 is next year's dividend, r is the required rate of return, and g is the growth rate calculated above. An accurate estimate of g is vital for determining if a stock is undervalued or overvalued.