Historical Dividend Growth Formula

Historical Dividend Growth Formula

Dividend Growth can be calculated with following formula. Dividend Growth formula has been explained with an example.

Dividend Growth Formula =            Dividend During the year     - 1  x 100                                                       Dividend of Last Year

Dividend Growth means that at what pace the dividend is growing. Historical dividend growth is calculated with the help of historical data. Growth is an important aspect for investment related decisions.

Historical Dividend Growth Calculation Methods

Dividend Growth is calculated by dividing the dividend for the year or current year with dividend of last or previous year. Historical Dividend growth can be classified into four classes

·         No Growth (constant Dividend)

·         Constant Growth

·         Random Growth

·         Negative Growth

It is important to mention that Dividend growth can also be calculated with Gordon Growth formula, but such growth is future growth. Gordon Growth formula is G= Br, this formula has been explained in my other article.

Significance of Historical Dividend Growth

Dividend growth is vital information for investment decision. Many people in the world plan their investment on the bases of dividend growth prospectus of the company. Divided growth information is also used to calculate share price of a company.

Dividend is more reliable gain from the share investment and investors are interested to know the growth opportunity of this gain. The growth opportunity may be estimated by historical growth and future predication. In this article we focused on the historical information or historical Growth of dividend.

Significance of Dividend Growth may be listed as below

1.    Growth helps investors to make investment decisions

2.    Growth of dividend may be used to calculate share value of company

3.    Growth is an indicator of good financial performance of company.

Zero Dividend Growth Examples

Year 1          13

Year 2          13      

Year 3          13

Solution

Year 1          13                   =0

Year 2          13 /13                  

Year 3          13/13

 Dividend Growth Formula Example (Constant Growth)

Year 1          12

Year 2          15       

Year 3          18.75

Solution

Year                              Dividend Growth

Year 1          12

Year 2          15/12                =25%

Year 3          18.75/15            =25%

Above example shows that dividend is growing at constant rate of 25%. In other word it shows that company has policy to maintain a constant dividend growth policy.

Dividend Growth Example (Random Growth)

Year 1          18

Year 2          20        

Year 3          26

Year 4          27

Solution

Year                              Dividend Growth

Year 1          18

Year 2          20/18            =11.11%

Year 3          26/20            =30%

Year 4          27/26            = 3.8%

 Constant Dividend & Constant Growth

Constant dividend and constant growth are two different concepts. Constant dividend means Zero Growth, while constant Growth means dividend is growing with a constant pace (which may be 10% or 20% etc). Difference between constant dividend and constant dividend growth has been explained below with two examples.

Constant Dividend

Year	Dividend	Dividend Growth
1	5	Zero
2	5	Zero
3	5	Zero

Constant Growth

Year	Dividend	Dividend Growth
1	5
2	7	7/5=    40%
3	9.8	9.8/7= 40%