Calculating IRR and Investment Viability

Dividend four years ago (D0) = $1.65 per share. Also, Dividend yesterday (D4) = $2.10 per share. Firstly, we can calculate the growth rate:
Growth rate (g) = (D4 – D0) / D0
g = ($2.10 – $1.65) / $1.65
g = $0.45 / $1.65
g = 0.2727 or 27.27%

Project the dividends for the next five years:

Dividend in the fifth year (D5) = D4 + (g * D4)
D5 = $2.10 + (0.2727 * $2.10)
D5 = $2.10 + $0.5727
D5 = $2.6727 per share

Dividend in the sixth year:

(D6) = D5 + (g * D5):
D6 = $2.6727 + (0.2727 * $2.6727)
D6 = $2.6727 + $0.7282
D6 = $3.4009 per share

Dividend in the seventh year (D7) = D6 + 5% growth
D7 = $3.4009 + (0.05 * $3.4009)
D7 = $3.4009 + $0.1700
D7 = $3.5709 per share

So, the company’s dividend in seven years will be $3.5709 per share.

There are 2 components that we need to discuss for total return on the share of stock: Dividend Yield & Dividend Growth. And we also can know that the formula of Total Return = Dividend Yield + Dividend Growth.

The dividend yield is the dividend paid per share divided by the stock’s current price. It represents the income earned from holding the stock in the form of dividends. The dividend yield is an estimate of the dividend-only return of a stock investment (Fernando,2023).The dividend growth represents the rate at which dividends are expected to increase over time. This growth rate is often based on the historical growth rate or the expected future growth rate of the company’s dividends.

Typically, the dividend growth component is expected to be larger, especially for well-established companies that have a history of increasing dividends steadily. Since when companies keep growing. It would be more profitable and may increase their own dividends. However, the actual proportions would also depends on their companies performance.

Reference:

Fernando, J. (2023, July 5). Dividend yield: Meaning, formula, example, and pros and cons. Investopedia. https://www.investopedia.com/terms/d/dividendyield…

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