Sustainable dividend growth

A common estimate is g = b × r, where b is the proportion of earnings retained and r is the expected return on the reinvested funds. The approximation assumes the retention policy and returns remain stable and earnings growth translates into dividend growth. Historical growth can also be estimated using a compound rate, but it need not continue. Retaining more profit creates value only if reinvestment earns an appropriate return for its risk. A higher growth forecast should not be inserted into a valuation without examining feasibility and financing needs.