How to Calculate Expected Future Dividends

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There are two ways in which investors can earn money from stocks: share price appreciation and dividends. It is not surprising that most stock valuation models use share price or dividends as a driver for intrinsic stock value. One such model is the Gordon Growth Model, which can determine the value of a stock based on a future series of dividend payments. The challenge is determining the "expected dividend."

  • Research the dividend growth rate. Look for guidance in the Annual report, press release, 10k's and 10q's. Also look to analyst financial projections in the back of research reports. Information on dividends is also commonly discussed in the notes to the financial statements. If there's no information use a historical growth rate.

  • Get a historical growth rate. Go to your financial statements to look up the quarterly dividend for the past 2 years. Subtract the current dividend from the dividend a year ago. Divide this difference by the dividend a year ago and multiply by 100 for a percentage growth rate.

  • Work through an example. Let's assume a company just paid a dividend of $3 a share. According to company reports the dividend is expected to continue to grow 8 percent for the first 2 years and then 5 percent thereafter.

  • Calculate the expected dividend per share for Year 2. Multiply the dividend payout amount ($3) by the expected growth rate (8 percent) and add the Year 1 dividend amount. The calculation is $3.00 * .08 = .24 + $3 = $3.24. This is the expected dividend for Year 2.

  • Calculate the expected dividend for Year 3 at a 5 percent rate of growth. Multiply the new dividend by the new interest rate; that is, $3.24 * .05 + $3.00 = $3.50

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