Dividend Growth Calculator (future dividend & yield on cost)

Understanding the dividend growth calculator — concept and principle

Dividend growth investors buy companies that raise their dividends year after year, so the income from a fixed holding rises over time. This calculator projects how large your annual dividend becomes after a number of years at a steady growth rate, what that means as a yield on the price you paid, and how much you collect along the way.

How it is calculated

• Future dividend: Dₙ = D₀ × (1 + g)ⁿ, where D₀ is today's annual dividend, g the growth rate and n the number of years.
• Yield on cost (YoC) = annual dividend ÷ cost of investment × 100, today and in year n.
• Total dividends = D₀(1 + g) + D₀(1 + g)² + … + D₀(1 + g)ⁿ, the dividends of years 1 to n.
• Years to double = ln 2 ÷ ln(1 + g).

Dividends are not reinvested and no new shares are bought; taxes are ignored.

The principle

A constant growth rate makes the dividend a geometric sequence, so it compounds just like interest. The sum of the yearly payments is a geometric series. Yield on cost rises because the dividend grows while the price you paid stays fixed; it says nothing about the current market yield. The doubling time follows from solving (1 + g)ᵗ = 2; the familiar rule of 72 gives a quick check, 72 ÷ 7 ≈ 10.3.

Worked example

1. Inputs: dividend $1,200 a year, growth 7%, cost $30,000, 15 years.
2. Today's yield on cost: 1,200 ÷ 30,000 = 4%.
3. Year-15 dividend: 1,200 × 1.07¹⁵ ≈ 1,200 × 2.759 = $3,311.
4. Future yield on cost: 3,311 ÷ 30,000 = 11.04% (about 11%).
5. Total dividends, years 1 to 15: $32,266, more than the original cost.
6. Doubling time: ln 2 ÷ ln 1.07 ≈ 10.2 years.

How to read the result

The final dividend shows the income the same shares could produce if the growth holds. Long dividend growth streaks are rare; many mature companies raise dividends roughly in line with earnings, and few sustain high single-digit growth for decades. Try a lower growth rate to see a conservative case, and compare the future YoC with what you could earn on new money today, since a high YoC does not mean the stock is still a good buy.

Common mistakes

• Confusing yield on cost with current yield. Buyers today get the market yield, not your YoC.
• Assuming growth never stops. Dividend cuts happen, especially in recessions.
• Forgetting that the total excludes reinvestment; reinvested dividends would grow faster.

Frequently asked questions

What dividend growth rate is realistic?

It depends on the company and period. Use historical growth of the stock or fund only as a guide, and test lower rates.

Is a high yield on cost good?

It shows your income grew relative to what you paid, but decisions should use current yield and fundamentals.

How is yield on cost different from total return?

YoC covers only income; total return also includes price changes.

Sources: M. J. Gordon, "Dividends, Earnings, and Stock Prices," Review of Economics and Statistics, 1959 (constant-growth dividend model) · Z. Bodie, A. Kane, A. J. Marcus, Investments, McGraw-Hill