If you’re using a dividend discount model to build a dividend portfolio, you probably know that the dividend growth rate is a crucial factor. Here are some tips on how to forecast this growth rate to complete your analysis.
**Building a Dividend Model and Forecasting Growth Rate**
For those of us who focus on dividends, finding the best opportunities for growth is always a priority. One simple tool I use is the short-form dividend discount model. This model provides a quick way to evaluate a dividend stock by estimating the future value of its dividends. You can even download a version of this model for free, which should help improve your dividend portfolio.
The most sensitive input in the dividend discount model is the dividend growth rate. To get accurate results, it’s essential to know how to predict this growth rate accurately.
I’ve invested in a dividend portfolio to work towards financial independence and even created a free calculator to help understand retirement through dividends.
**Understanding the Dividend Growth Rate**
The dividend growth rate is the annual percentage increase in a stock’s dividend over time. You can measure this using either the least squares method or a simple annualized figure over a chosen period. It’s a vital part of a dividend growth strategy, but not the only factor—just like you shouldn’t buy stocks based solely on annual dividend yield. I prefer to evaluate dividend stocks based on their overall value first.
**Methods for Predicting Dividend Growth Rate**
In today’s unpredictable market, analyzing a company’s dividend growth to assess performance is often more reliable than chasing high yield. Examining a company’s historical dividend growth is one of the best ways to forecast its future. While historical data doesn’t guarantee future success, it’s a useful baseline for adjusting your expectations.
To adjust the expected growth rate, consider:
– The forecasted earnings growth for the next fiscal year.
– The current payout ratio.
– The company’s long-term earnings growth.
– The growth prospects of the industry.
For deeper analysis, the two-stage dividend growth model can help refine your growth rate predictions based on these factors.
**Expert Insights on Predicting Dividend Growth**
In a podcast, Craig Jerusalim, a portfolio manager at CIBC Global Asset Management, emphasized that a high yield doesn’t necessarily mean a company is a safe investment. Over time, most shareholder returns often come from dividends. However, significant price drops can wipe out these gains quickly, making it crucial to focus on sustainable growth rather than just yield.
Jerusalim noted that in the energy sector, despite many companies having high yields, there’s little price support. This lack of support means energy companies might need to cut dividends further due to low energy prices. In contrast, other sectors may offer better dividend outlooks despite low yields, owing to strong growth opportunities and solid financial positions.
Jerusalim suggested two indicators for evaluating a company’s potential for dividend growth and sustainability:
– Having a low payout ratio for flexibility.
– A return on capital exceeding the cost of capital, allowing earnings to be reinvested for further growth.
**Conclusion on Forecasting Dividend Growth**
Forecasting dividend growth is vital for a successful dividend investing strategy. An accurate forecast can significantly influence your investment decisions and overall portfolio.
Do you have strategies for forecasting dividend growth rates? What methods do you use to build a robust dividend portfolio? We’ve also provided a list of seven promising dividend growth stocks for a secure retirement. For those looking to diversify further, global dividend growth funds can broaden your international exposure.
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