Supernormal Dividend Growth

Definition of 'Supernormal Dividend Growth'


A period of time in which the dividends issued on shares of a stock are inceasing at a higher than average rate. The high growth rate of payouts are seen as above normal, thus "supernormal". Because this rate is also expected to be unsustainable, the dividend growth rate should return to normal levels again. Supernormal dividend growth is a projected rate based on an analysis of a company and/or industry, which determines a period of increased earnings and thus potential payouts.

Investopedia explains 'Supernormal Dividend Growth'


Stocks of these companies can be valued using a discounted cash flow model. Investors who purchase stocks based on dividend growth should know three general models:

1. Dividend discount model with no growth in dividends.
2. Dividend discount model with constant dividend growth.
3. Dividend discount model with supernormal dividend growth.

Even though "growth" is used, you should think about the change in dividend payments, this will include decreases into you discount models. In this sense, periods of different rates of growth are discounted separately, then combined to get the total value. In these calculations, investors have to determine the required rate of return, the time periods, and rate of growth, all of which are difficult to predict and can drastically change the valuation of the stock.



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