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You must first understand the key indicators of stocks before you make any investments in stock market. The dividend growth rate is one such indicator. Companies that are publicly listed pay dividends to their shareholders in cash and other forms. Dividends are paid from the company's net profits. The dividend growth rate can be calculated in stock markets to help you make informed decisions and calculate long-term returns on your stocks investments.

Dividend growth rate refers to the percentage of stock growth over a given time period. This rate is usually calculated annually, due to the fact that dividends are increased over time by companies. If required, you can calculate the dividend growth rate for stock markets on a quarterly basis, half-yearly, or monthly basis.

Valuation models like the dividend discount model can be used to determine the stock's value. To calculate the stock's intrinsic value, this model of stock valuation considers factors like the company's net current value. To determine the price of a stock, you must subtract the excess of the company’s internal growth rate (the highest growth rate that a company can achieve without borrowing externally) from the estimated dividend rate. The model determines that a stock's current stock price should not be lower than its calculated price. The formula for the dividend discount model's mathematical formula is P0 = D1/r–g. Po is the current stock price and D1 is the next year's dividends. r and g indicate the cost of equity and dividend growth rates.

Dividend growth rate can be calculated using the compounded or arithmetic method calculations.

**This method will allow you to calculate the dividend growth rate using the steps below:**

**Step 1**You will need to locate information about dividend payments over a time period. The relevant date can be found in the annual reports for a company. The mathematical formula G1=D2/D1-1 can be used to calculate the dividend growth rate. G1 represents the periodic dividend growth, D2 the dividend payment in the second, and D1 the dividend payout from the previous year. If XYZ has paid Rs 10,000 in annual dividends in 2010 and Rs 10,500 in dividend payments in 2011, then the dividend growth rate is 10,500/10,000-1= 0.05/5%. The chart below shows the dividend growth rates for XYZ over a time period.

Year | Dividend | Dividend Growth Rate |

2010 | Rs 10,000 | - |

2011 | Rs 10.500 | 5.0% |

2012 | Rs 11.500 | 9.52 % |

2013 | Rs 11.700 | 1.74% |

2014 | Rs 12,500 | 6.84% |

**Step 2**Now determine the number years for which periodic dividend growth rates were provided. This number is denoted by the dividend growth rate formula using an arithmetic median. For example, in the chart above, n=4.**Step 3:**Now you are required to use the mathematical formula: Dividend growth rate = (G1+G2+G3......+Gn)/ n. So, as per the above mentioned chart the arithmetic average will be 5%+9.52%+1.74%+6.84%/4= 5.78%.

**Dividend Growth Rate Formula using Compounded Method Calculation**: To find out about dividend growth rates in stock markets, you can also use CAGR (Compound Annual Growth Rate) to calculate it. Follow the below steps:

**Step 1**First, find the initial dividend payment in a company's annual report. The initial dividend payment period is D0. This is the dividend growth rate formula that uses the compounded method. Next, calculate the most recent or final dividend payout period. This is indicated by Dn.**Step 2**Now you need to calculate the number years starting from the initial dividend payments year and ending with the final dividend payments year. This variable is denoted by the CAGR method.**Step 3**Now, you can calculate the compounded annual growth rate of dividends by dividing the final distribution with the initial dividend and putting the calculated variable to power of reciprocal for the number of periods. To get the final number, subtract one from it. This formula for dividend growth rate can be expressed mathematically as: Dividend growth ratio= (Dn/D0),1/n-1.

Let's look at an example to help us understand how the calculation works. Let's say that the dividend payments for ABC company are:

Year | Annual Dividend | Dividend Growth Rate |

2014 | Rs 18.200 | - |

2015 | Rs 19.800 | 8.79% |

2016 | Rs 21 800 | 10.0% |

2017 | Rs 24,000 | 10.09% |

2018 | Rs 27200 | 13.33% |

The above-mentioned formula for calculating dividend growth rate will result in the following: (27.200/18.200) 1/4 -1)*100= 10.57%. According to the compounded growth method, the annualised dividend rate for company ABC will therefore be 10.57%.

Individual investors can reap the following benefits by calculating the dividend growth rate on stock markets:

This concept will help you determine how much you could earn from a company's stock. A company with strong dividend growth over many years could indicate future dividend growth. This would indicate long-term profitability for your investment.

You can use the dividend discount method of stock valuation to determine the intrinsic value of stocks once you have determined the dividend growth rate.

You can also use mathematical formulas to calculate growth rates for all intervals, apart from the annual dividend rate growth calculation.

Investors must understand how dividend growth rates work in stock markets. You should be able to trust and rely on your financial partner, in addition to understanding the fundamentals of stock market trading. You can get multiple benefits from a stockbroking firm with proven credentials, such as free Demat and trading account, free equity delivery trade for life, single point market access, and personalized customer support.