Dividend Retention and Dividend Growth
Dividend retention and
dividend Growth relationship was explained by the Gordon by a formula i.e.
Growth = Retention x rate of investment. it means that with more retention of
dividend , growth of dividend may be accelerated. This has been explained with
an example,
Dividend Retention and Dividend Growth Example
B has profitable operation
and is interested in future growth of dividend. The cost of investment of C
& Co is 13%. There are two suggestions that to retain 40% and 60% of its
income, which option should be chosen for higher growth rate of dividend.
Solution
Gordon
Growth of Dividend = Retained Earning x Return, this formula can be expressed
G=Br
Where,
G=
Dividend Growth Rate
B=
Retained earning
r=
Rate of return on equity
1. Dividend Retention 40%
= 40% x 13%
=5.2%
2. Dividend Growth 60%
=
60% x 13%
=7.8%
Above results clearly shows that growth of dividend
increases by retaining more earning.
