Dividend Growth Calculations

Recently I spoke about my actual experience with dividend growth stocks. Today I want to talk about the theory and how to calculate dividend growth. The problem with doing straight calculations is that life is messier than such calculations.

Over the life of a stock a shareholder might buy and sell shares of the stock at different times. Also, dividend increases vary all the time and sometimes dramatically. In recessions companies tend to low dividend increases and in expansions tend to raise them. Also in recessions some companies will lower or stop dividends for a time.

What I will illustrate is 6 different scenarios, 3 with higher dividends and 3 with lower dividends and all with different dividend growth rates. I am basing these scenarios on some actual performance of stocks I own. The scenarios are as shown below with the names of stocks which matched in the past these sorts of original dividends and dividend growth rates.

#	Similar	Ori Yield	Div Growth
1	RY	4.70%	11.00%
2	BMO	6.70%	6.30%
3	RIO.UN	7.60%	3.10%
4	ATD.B	0.80%	15.30%
5	SAP	2.20%	11.80%
6	SNC	1.90%	22.00%

The first table shows what sorts of dividend yield you could expect on your original investment after 5 years and what percentage of your original stock costs would be covered after 5 years. So for the first stock after 5 year your dividend yield should be around 7.9% on your original costs. The dividends paid to the end of the 5th year should cover some 32.40% of your stock's original cost. I have highlighted the stock with the highest and lowest dividend yield after 5 years. I have also highlighted the stocks for which dividends have covered the most and the least of the original stock cost.

#	Similar	Ori Yield	Div Growth	Div Yield	% of stock
1	RY	4.70%	11.00%	7.90%	32.40%
2	BMO	6.70%	6.30%	9.00%	40.10%
3	RIO.UN	7.60%	3.10%	8.80%	41.30%
4	ATD.B	0.80%	15.30%	1.60%	6.10%
5	SAP	2.20%	11.80%	3.90%	15.80%
6	SNC	1.90%	22.00%	5.00%	17.60%

After 10 years the table below shows what the dividend yield should be on your original stock cost and what percentage of the original costs have now been covered by dividends paid to date. Here the stocks with the highest dividend yield on original cost and percentage of stock's cost covered has changed. Stock #1 with a good dividend and good growth and stock #6 with a low dividend and high growth compete for the highest dividend yield on original cost.

After 10 years the stock (#2) with a good dividend and moderate growth has covered more of the original cost of the stock. The stock (#4) that has covered the least percentage of the original cost has a low dividend with fairly high growth.

#	Similar	Ori Yield	Div Growth	Div Yield	% of stock
1	RY	4.70%	11.00%	13.40%	87.40%
2	BMO	6.70%	6.30%	12.20%	94.40%
3	RIO.UN	7.60%	3.10%	10.30%	89.80%
4	ATD.B	0.80%	15.30%	3.20%	18.40%
5	SAP	2.20%	11.80%	6.80%	43.50%
6	SNC	1.90%	22.00%	13.40%	64.50%

Things change again after 15 years. It is a stock with a rather low initial dividend but a high dividend growth that has the highest dividend yield on original cost. It is also the one that has covered the highest percentage of the stock's cost. The one with the lowest dividend yield on original cost is the stock starting off with a very low dividend, but a fairly high right of growth.

#	Similar	Ori Yield	Div Growth	Div Yield	% of stock
1	RY	4.70%	11.00%	22.50%	179.90%
2	BMO	6.70%	6.30%	16.60%	168.10%
3	RIO.UN	7.60%	3.10%	11.90%	145.90%
4	ATD.B	0.80%	15.30%	6.70%	43.90%
5	SAP	2.20%	11.80%	11.90%	91.60%
6	SNC	1.90%	22.00%	36.10%	190.70%

The last table shows what the dividend yields on original cost and what percentage of the original stock costs are covered after 20 years. All but one of the stocks has covered with dividends the original cost of the stock. They are all giving quite good dividend yields on the original cost of the stock.

#	Similar	Ori Yield	Div Growth	Div Yield	% of stock
1	RY	4.70%	11.00%	38.10%	336.00%
2	BMO	6.70%	6.30%	22.50%	268.00%
3	RIO.UN	7.60%	3.10%	13.90%	211.40%
4	ATD.B	0.80%	15.30%	13.70%	96.40%
5	SAP	2.20%	11.80%	20.90%	176.10%
6	SNC	1.90%	22.00%	97.50%	531.30%

See the full spreadsheet here.

On my other blog I am today writing about Power Corp of Canada (TSX-POW, OTC-PWCDF) ... continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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