Dividend Growth and Rate of Investment

 Dividend Growth and Rate of Investment

Dividend Growth and rate of investment relationship was explained by the Gordon by a formula i.e. Growth = Retention x rate of investment. It suggests that with higher rate of investment, we can expect higher growth in future. This relationship has been explained with below example,

 Dividend Growth and Rate of investment Example

F & Co rate of investment for 2001 & 2002 is 5% and 8% respectively. F & Co has consistent policy to retain 50% of its earning. Calculate the divided for both years?

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.    Rate of investment 5%

= 50% x 5%

=2.5%

1.    Rate of investment 8%

= 50% x 8%

=4%

The above results clearly that rate of investment the growth rate increases.