how to calculate the dividend growth rate
an investor can calculate the dividend growth rate by taking an average or geometrically for more precision as an example of the linear method consider the following a company s dividend payments to its shareholders over the last five years were to calculate the growth from one year to the next use the following formula in the above example the growth rates are the average of these four annual growth rates is 3 56 to confirm this is correct use the following calculation example dividend growth and stock valuationto value a company s stock an individual can use the dividend discount model ddm the dividend discount model is based on the idea that a stock is worth the sum of its future payments to shareholders discounted back to the present day the simplest dividend discount model known as the gordon growth model ggm s formula is p d 1 r g where p current stock price g constant growth rate expected for dividends in perpetuity r constant cost of equity capital for the company or rate of return d 1 value of next year s dividends begin aligned p frac d 1 r g textbf where p text current stock price g text constant growth rate expected for text dividends in perpetuity r text constant cost of equity capital for the text company or rate of return d 1 text value of next year s dividends end aligned p r gd1 where p current stock priceg constant growth rate expected fordividends in perpetuityr constant cost of equity capital for thecompany or rate of return d1 value of next year s dividends in the above example if we assume next year s dividend will be 1 18 and the cost of equity capital is 8 the stock s current price per share calculates as follows p 1 18 8 3 56 26 58 