1

According to http://www.investopedia.com/terms/d/dividendgrowthrate.asp , this is how I'm going to calculate dividend rate.

Year 1 = $1.00
Year 2 = $1.05
Year 3 = $1.07
Year 4 = $1.11
Year 5 = $1.15

Year 1 Growth Rate = N/A
Year 2 Growth Rate = $1.05 / $1.00 - 1 = 5%
Year 3 Growth Rate = $1.07 / $1.05 - 1 = 1.9%
Year 4 Growth Rate = $1.11 / $1.07 - 1 = 3.74%
Year 5 Growth Rate = $1.15 / $1.11 - 1 = 3.6%


The average of these four annual growth rates is 
(5% + 1.9% + 3.74% + 3.6%) / 4 = 3.56%

However, I was wondering, if Year 4 doesn't pay out any dividend, how should the growth rate be calculated?

Year 1 = $1.00
Year 2 = $1.05
Year 3 = $1.07
Year 4 = $0
Year 5 = $1.15

Year 1 Growth Rate = N/A
Year 2 Growth Rate = $1.05 / $1.00 - 1 = 5%
Year 3 Growth Rate = $1.07 / $1.05 - 1 = 1.9%
Year 4 Growth Rate = $0 / $1.07 - 1 = -100%
Year 5 Growth Rate = ?


The average of these four annual growth rates is 
?

Is there any generalized equation, to calculate dividend growth rate?

  • You don't compute an average growth rate by averaging the growth rates. You can't average percentages of different things. A company with an average dividend growth rate of 3.56% would go from $1.00 to $1.19 in five years. ($1 * (1.0356^5)) = 1.191 If you only go from $1.00 to $1.15 in 5 years, that's an average growth rate of 1.028%. (See the formula on the page you linked.) – David Schwartz Oct 19 '17 at 0:06
  • Hi David, thanks for your comment. But, I'm some how confused. Isn't the formula on the page is showing $1 x (1 + 3.56%) ^ 4 = $1.15 ? They are using power of 4 year, not power of 5 year. – Cheok Yan Cheng Oct 19 '17 at 0:15
2

If the company sometimes doesn't pay a dividend in a year, then you can't really calculate dividend growth rate using this method, because you would be dividing by zero. The formula assumes that each year a dividend is paid.

To calculate the dividend growth rate for a data set where the company skips a payment, you need to use a different time period. For example, you might look at the data every 2 years. Using the data on your example:

Year 1 & 2: $2.05
Year 3 & 4: $1.07  (-48%)
Year 5 & 6: $2.32 (+117%) (Assume $1.17 in Year 6)

The average dividend growth rate is 34.5% in two years, or about 17% annually. As you can see, this is not a very good representation of what actually happened, because the anomaly that happened in Year 4 threw off the average. If you think that Year 4 was truly an unusual event that is unlikely to happen again, you could throw out that data point in predicting your future dividend growth, perhaps like this:

Year 1-2: 5%
Year 2-3: 1.9%
Year 3-5: 7.5%/2 years, 3.25% per year
Average: 3.6% per year

Alternatively, if you think that your company is likely to skip dividend payments in the future, you'll want more data points so that you'll have some idea of how often that will happen.

  • Thanks for introducing such technique. May I know is Year 3-5: 7.5%/2 years, 3.25% per year common used technique, in financial industry? – Cheok Yan Cheng Oct 18 '17 at 4:51
  • @CheokYanCheng I don't know if any of this is common in the financial industry. This is just how I would do it if I wanted to try to get an idea of how fast the dividend payout is growing. – Ben Miller Oct 18 '17 at 10:55

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