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. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Gordon Growth Model

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

    The annualized percentage rate of growth that a particular stock's ...
  4. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  5. Discounted Cash Flow - DCF

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

    A procedure for valuing the price of a stock by using predicted ...
RELATED FAQS
  1. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  2. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  3. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  4. When does the holding period on a stock dividend start?

    The holding period on a stock dividend typically begins the day after it is purchased. Understanding the holding period is ... Read Full Answer >>
  5. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>
  6. How can a company reduce the unsystematic risk of its own security issues?

    Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>
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

    Do Stock Splits Cause Volatility?

    Since stock splits decrease the stock price, do they also increase volatility because shares are traded in smaller increments? Investopedia examines assumptions about this increasingly common ...
  8. Trading Strategies

    Dividend Versus Buyback: Which Is Better?

    Companies reward their shareholders in two main ways--by paying dividends or buying back shares. An increasing number of blue-chips are now doing both.
  9. Trading Strategies

    Microsoft's Game of Catch-Up With The Dow

    Microsoft (MSFT) underperformed the Dow Jones Industrial Average during the 2002 to 2007 bull market, but it has played catch-up in recent years.
  10. Investing

    Is It Time To Buy Commodities?

    Despite the news, the Athens Stock Exchange is down less than 5 percent year-to-date, while the Shanghai Composite remains up more than 10 percent.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!