Below are some useful link for my reference.
Chowder Rule – http://seekingalpha.com/instablog/728729-chowder/2360292-the-chowder-rule
“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.”
Stock Analysis – http://seekingalpha.com/article/4015814-new-southern-company?app=1&uprof=45&isDirectRoadblock=true
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
