Calculate the dividend growth rate over the last four years.
Dividend four years ago = $1.65 per share
Dividend yesterday = $2.10 per share
Dividend growth rate = (Dividend yesterday – Dividend four years ago) / Dividend four years ago
Dividend growth rate = ($2.10 – $1.65) / $1.65
Dividend growth rate = $0.45 / $1.65
Dividend growth rate ≈ 0.2727 or 27.27%
27.27%/4= 6.8175
Calculate the dividend for the next five years using the same growth rate.
Next year’s dividend = $2.10 ($2.10 * 0.068175) ≈ $2.24 per share
Year after next = $2.24 ($2.24 * 0.068175) ≈ $2.39 per share
Third year = $2.39 ($3.39 * 0.068175) ≈ $2.55 per share
Fourth year = $2.55 ($2.55 * 0.068175) ≈ $2.72 per share
Fifth year = $2.72 ($2.72 *0.068175) ≈ $2.91 per share
Calculate the dividend in the seventh year 5% growth rate)
Sixth year = $2.91 ($2.91 * 0.05) ≈ $3.1 per share
Seventh year = $3.1 ($3.1 * 0.05) ≈ $3.3 per share
1. The company’s dividend in seven years is approximately $3.3 per share.
2. The two components of the total return on a share of stock based on the dividend growth model are dividend yield and dividend growth rate. The larger component depends on the specific company and market conditions. Generally, mature companies have a higher dividend yield, while growth companies have a higher dividend growth rate.