Dividend
to Earning Ratio and Dividend Growth
High dividend to earnings
ratio negatively impacts the dividend future growth. This is because funds are
not reinvested for earn profit in future, rather it is paid. This concept can
be explained by following example
Dividend to earnings Ratio = (Dividend)
(Earning)
Divided
to earnings Ratio example
A company has paid divided 5 million & 10 million
during the year 2001 & 2002 respectively. The earning of the company was 20
million each year. the rate of investment is 15%.
Solution
1. 10 million Dividend payment
= Dividend/earning
= 5million/20 million
= 25%
Dividend Growth = 75% x 15%
=11.25% (Dividend Growth)
2. 5 million dividend payment
= Dividend/earning
= 10 million/20 million
= 50%
Dividend Growth = 50% x 15%
=7.5% (Dividend Growth)
Above example shows that with
high dividend to earnings ratio, you will achieve low growth rate, while in
case of low dividend to earnings ratio, you will achieve high dividend growth.
