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.

BREAKING DOWN '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. Supernormal Growth Stock

    A security that experiences particularly robust growth over an ...
  2. Dividend Growth Rate

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

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

    A model for determining the intrinsic value of a stock, based ...
  5. Dividend Discount Model - DDM

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

    The total expected dividend payments from an investment, fund ...
Related Articles
  1. Investing

    Understanding the Supernormal Growth Model

    The supernormal growth model values a stock that’s expected to have higher than normal growth in dividend payments for some period in the future.
  2. Investing

    Valuing A Stock With Supernormal Dividend Growth Rates

    If these calculations are off, it could drastically change the value of the shares.
  3. Investing

    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.
  4. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  5. Markets

    Using the Dividend Discount Model

    The dividend discount model is a way of applying net present value analysis to estimate the future dividends a stock will pay. Those dividends are then discounted back to their present value. ...
  6. Investing

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  7. Investing

    Microsoft Is Paying Dividends. Is Its Share Price Undervalued Or Overvalued Based On DDM? (MSFT)

    How can you use the dividend discount model to estimate the value the common stock of Microsoft?
  8. Managing Wealth

    The Risks of Chasing High Dividend Stocks

    Dividend stocks offer enticing yields, but a lot can go wrong on the way to collecting that dividend payout.
  9. Investing

    How Dividends Work For Investors

    Find out how a company can put its profits directly into your hands.
  10. Investing

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
RELATED FAQS
  1. How can we find out whether stocks are overvalued or undervalued?

  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Learn where analysts and investors can find the three pieces of necessary information that allow them to calculate the dividend ... Read Answer >>
  3. What does the Dividend Discount Model (DDM) show an investor about a company?

    Discover the purpose of the dividend discount model, or DDM, of stock analysis and what it specifically aims to evaluate ... Read Answer >>
  4. How can I use the Dividend Discount Model (DDM) effectively for a stock with fluctuating ...

    Find out how the dividend discount model is applied to stocks with irregular dividend payments and how firms with irregular ... Read Answer >>
  5. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
  6. What is the difference between dividend yield and dividend payout ratio?

    Understand the difference between the dividend yield and the dividend payout ratio, two basic investment valuation measures ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center