Dividend Growth Rate
One of the difficult numbers to plug into the calculator is Dividend Growth Rate.
Most of the other numbers are already known based on the current price of the stock and expected inflation numbers.
But the Dividend Growth Rate could be any number of things and is where the true art of investing comes into play.
The first way to get a Dividend Growth Rate is to simply look at what rate the Dividend has grown over the past 5,10, and 20 years and try to create an average from this.
For example, I’m going to show you how to get a 5 year Dividend Growth Rate for AT&T.
First, go to Dividend.com, if I choose the stock AT&T and I view Histrorical Dividend Data for them I can sum up there year 2009 dividends which equals $1.64. If I then look at the total dividends paid in 2004, the total for 2004 =$1.25.
So, 2009 = $1.64. 2004 = $1.25. To get the average Dividend Growth Rate. Simply subtract 2004 from 2009 and then divide by 2004 and divide by the number of years.
((2009 dividends – 2004 dividends)/2004 dividends)/(# of years)
So (((1.64 – 1.25)/1.25)/(5)) = .0624
So, for AT&T they’ve had a 5 year Dividend Growth Rate of .0624. You could plug in this number directly into the calculator.
For my own calculations, I calculate a 5 year Dividend Growth Rate, a 10 year Dividend Growth Rate, and a 20 year Dividend Growth Rate if available and then take the average of the 3.
This method should give you a solid start at valuing Dividend Stocks.
A few things to note with Dividend Growth Rates.
1. The highest sustainable dividend growth rate over any 20 year period is something like 15%, so if a young company has grown it’s 5 year dividend 15%, I don’t expect this to be likely in the future and use something like 10%.
2. If a company has a Dividend Growth Rate that is higher than it’s Return on Equity, I usually use the number from Return on Equity. If a company isn’t growing it’s overall return that means the Dividend Growth has come from higher Payout Ratios. And although this is good, unless you can see them increasing Payout Ratios in the future, the expected Dividend Growth Rate will be closer to the Return on Equity than the historical Dividend Growth Rate
Good luck in your investing!