Oct 28

## Dividend Investing

Below are some useful link for my reference.

“Buy stocks that meet the Total Dividend Return (TDR) rule a/k/a the “chowder rule,” requiring a yield plus Five year Dividend Growth Rate (DGR) total of 12% or more. In the case of utilities, MLPs and REITs, the total is 8% or more.”

## Calculation Example

The dividend growth rate can be calculated linearly 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:

Year 1 = \$1.00

Year 2 = \$1.05

Year 3 = \$1.07

Year 4 = \$1.11

Year 5 = \$1.15

To calculate the growth from one year to the next, the following formula is used:

Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1

In the above example, the growth rates are:

Year 1 Growth Rate = N/A

Year 2 Growth Rate = \$1.05 / \$1.00 – 1 = 5%

Year 3 Growth Rate = \$1.07 / \$1.05 – 1 = 1.9%

Year 4 Growth Rate = \$1.11 / \$1.07 – 1 = 3.74%

Year 5 Growth Rate = \$1.15 / \$1.11 – 1 = 3.6%

The average of these four annual growth rates is 3.56%. To confirm this is correct, the following calculation can be used:

\$1 x (1 + 3.56%) ^ 4 = \$1.15

## Growth Rate Used in Dividend Discount Model

The dividend discount model is used to value a company’s stock based on the idea a stock is worth the sum of its future payments to shareholders, discounted back to the present day. The formula takes into account three variable to arrive at a current price, P. They are:

D1 = the value of next year’s dividend

r = the cost of equity capital

g = the dividend growth rate

The dividend discount model’s formula is:

P = D1 / (r – g)

In the above example, if it is assumed next year’s dividend will be \$1.18 and the cost of equity capital is 8%, the stock’s current price per share is:

P = \$1.18 / (8% – 3.56%) = \$26.58