Expected Growth Rate of Dividends Calculator
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Retention Ratio (b)
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Sustainable Growth Rate (g)
–
Based on the Sustainable Growth Rate Model
function calculateGrowth() {
var roeInput = document.getElementById('roeInput');
var payoutInput = document.getElementById('payoutRatioInput');
var retentionResult = document.getElementById('retentionResult');
var growthResult = document.getElementById('growthResult');
// Parse values
var roe = parseFloat(roeInput.value);
var payoutRatio = parseFloat(payoutInput.value);
// Validation
if (isNaN(roe) || isNaN(payoutRatio)) {
alert("Please enter valid numbers for both ROE and Payout Ratio.");
return;
}
if (payoutRatio 100) {
alert("Dividend Payout Ratio should be between 0 and 100.");
return;
}
// Calculation Logic: Sustainable Growth Rate
// Formula: g = ROE * (1 – Payout Ratio)
// Note: Payout Ratio is entered as percentage (0-100), so we divide by 100.
var retentionRatioPercent = 100 – payoutRatio;
var retentionRatioDecimal = retentionRatioPercent / 100;
// Growth = ROE * Retention Ratio (b)
// Since ROE is a percentage, the result will be a percentage.
var growthRate = roe * retentionRatioDecimal;
// Display Results
retentionResult.innerHTML = retentionRatioPercent.toFixed(2) + "%";
growthResult.innerHTML = growthRate.toFixed(2) + "%";
}
Understanding the Expected Growth Rate of Dividends
Investors and financial analysts often need to estimate the future growth rate of a company's dividends to determine the fair value of a stock. One of the most reliable methods for calculating this "expected" growth is the Sustainable Growth Rate (SGR) model. This approach relies on the company's internal fundamentals: how profitable the company is (Return on Equity) and how much of that profit is reinvested back into the business (Retention Ratio).
The Logic Behind the Calculation
The logic assumes that growth is driven by the reinvestment of earnings. If a company pays out all its earnings as dividends, it has no capital left to expand operations, leading to zero growth. Conversely, if it retains earnings, those funds can generate additional returns at the rate of the company's Return on Equity (ROE).
g = ROE × (1 – Payout Ratio)
Where:
- g = Expected Dividend Growth Rate
- ROE = Return on Equity (Net Income / Shareholder Equity)
- Payout Ratio = The percentage of earnings paid out as dividends
- (1 – Payout Ratio) = Retention Ratio (b), or the percentage of earnings reinvested
Why These Inputs Matter
Return on Equity (ROE): This measures the efficiency with which a company uses shareholders' equity to generate profit. A higher ROE suggests that the company is efficient at generating returns on new capital.
Dividend Payout Ratio: This tells us how much cash is leaving the company. A high payout ratio is great for current income but leaves less money for future growth. A lower payout ratio implies high reinvestment, which should theoretically lead to higher growth rates, assuming the ROE remains stable.
Example Calculation
Consider a company with the following fundamentals:
- Return on Equity (ROE): 15%
- Dividend Payout Ratio: 40%
First, we determine how much of the earnings are kept by the company (the Retention Ratio):
Retention Ratio = 100% – 40% = 60%
Next, we multiply the ROE by the Retention Ratio to find the expected growth:
Growth Rate = 15% × 60% = 9.0%
This means the company is expected to grow its dividends at an annual rate of 9%, provided its profitability and payout policy remain constant.
Limitations
This calculator assumes that the company's ROE is constant and that it does not raise equity through selling new shares. It works best for mature, stable companies. For high-growth startups or companies with volatile earnings, historical growth analysis or multi-stage dividend discount models may be more appropriate.