Using the dividend growth model and assuming a dividend growth rate of 5%, what is the rate of return for one of three key competitors?

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Dividend growth is used for calculating the rate of return (ROR), on equity investments like stocks. This method, using a dividend rate growth of 5% as an assumption, can be used to calculate RORs for three of the key competitors. It is calculated by multiplying the current dividend payout per share by the expected rate of growth (5%) plus 1. This gives us the future value of the dividend payments. The ROR percentage is calculated by subtracting the present market price from it and dividing the result by the current price.

For example if competitor A has a current market price of $50 per share with an annual dividend payment of $2 per share; then their ROR would be calculated as ($2 x 1.05) – $50 /$50 = 4%. A competitor B would have a market price of $30 and an annual dividend payment amount of $1. Their ROR would then be ($1×1.05) -$30/$30 = 3.3%. Finally, competitor C would have a market price of $100 and a $4 annual dividend payment. Their ROR is ($4×1.05) -$100/$100 = 6

This method provides investors with insight into which stock may potentially provide better returns over time—however it should not be seen as investment advice as there are numerous other factors that need to be considered when making investment decisions such as industry trends or macro-economic conditions amongst many others.

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