Supernormal Dividend Growth

AAA

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.

RELATED TERMS
  1. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  2. Dividend Discount Model - DDM

    A procedure for valuing the price of a stock by using predicted ...
  3. Dividend

    1. A distribution of a portion of a company's earnings, decided ...
  4. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based ...
  6. Dividend Growth Rate

    The annualized percentage rate of growth that a particular stock's ...
Related Articles
  1. Markets

    Digging Into The Dividend Discount Model

    The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions.
  2. Investing Basics

    The Power Of Dividend Growth

    Dividends may not seem exciting, but they can certainly be lucrative. Learn more here!
  3. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
  4. Markets

    Valuing A Stock With Supernormal Dividend Growth Rates

    If these calculations are off, it could drastically change the value of the shares.
  5. Markets

    How To Choose The Best Stock Valuation Method

    Don't be overwhelmed by the many valuation techniques out there - knowing a few characteristics about a company will help you pick the best one.
  6. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  7. Fundamental Analysis

    What is a good interest coverage ratio?

    Learn the importance of the interest coverage ratio, one of the primary debt ratios analysts use to evaluate a company's financial health.
  8. Fundamental Analysis

    What is a bad interest coverage ratio?

    Understand how interest coverage ratio is calculated and what it signifies, and learn what market analysts consider to be an unacceptably low coverage ratio.
  9. Technical Indicators

    What is a good gearing ratio?

    Understand the meaning of the gearing ratio, how it is calculated, the definition of high and low gearing, and how they reflect relative financial stability.
  10. Investing Basics

    What is the difference between the gearing ratio and the debt-to-equity ratio?

    Dive deeper into gearing ratios: what are they, how are they used and why the debt to equity ratio is one of the most popular analytical gearing tools.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center