What is Sustainable Dividend Growth?
Sustainable dividend growth refers to a company's ability to grow its dividend payment consistently over time without compromising its financial health, increasing leverage beyond prudent limits, or paying out more than the business genuinely earns.
The key word is sustainable. Almost any company can grow its dividend for one or two years by cutting investment, drawing down cash reserves, or borrowing. A company that grows its dividend sustainably is one where each consecutive annual increase is supported by genuine underlying earnings growth — where the business itself is generating more profit each year, and the dividend is simply sharing that growing profit with shareholders.
The formal measure of this concept is the Sustainable Dividend Growth Rate (SGR) — also called the internal growth rate or the earnings retention growth model. It answers a specific question: given this company's profitability (ROE) and its decision about what fraction of earnings to retain vs pay out, what is the maximum rate at which earnings — and therefore dividends — can grow without external financing?
This is not a theoretical construct. SGR is used by professional equity analysts, credit rating agencies, and dividend-focused fund managers to assess whether announced dividend growth rates are credible or whether they represent financial engineering that will eventually require a cut or freeze.
SGR Synonyms and Related Terms
The concept of sustainable dividend growth appears under several names in financial literature and analyst reports. Understanding these synonyms helps you recognize the same analysis regardless of which term a source uses:
| Term | Usage Context | Same as SGR? |
|---|---|---|
| Sustainable Growth Rate (SGR) | Most common term in dividend analysis | ✅ Yes |
| Internal Growth Rate | Corporate finance textbooks — growth funded entirely by retained earnings without new debt | ✅ Essentially yes (same formula) |
| Plowback Growth Rate | Academic finance — "plowback" refers to retained earnings plowed back into the business | ✅ Yes — "b × ROE" formulation |
| Retention Growth Model | Valuation analysis — the component of the Gordon Growth Model for g | ✅ Yes |
| Dividend Growth Ceiling | Practitioner term — the rate beyond which dividend growth becomes unsustainable | ✅ Informal synonym |
| Payout Expansion Risk | Risk analysis — the risk that actual DGR exceeds SGR, forcing payout ratio to rise | Related concept — the risk of exceeding SGR |
How to Calculate the Sustainable Dividend Growth Rate
The SGR formula is elegantly simple. It requires only two inputs: Return on Equity (ROE) and the Dividend Payout Ratio.
SGR = ROE × Retention Ratio
SGR = ROE × (1 − Payout Ratio)
Where:
ROE = Net Income / Shareholders' Equity × 100
Payout Ratio = Dividends Per Share / EPS × 100
Retention Ratio (b) = 1 − Payout Ratio
= the fraction of earnings kept in the business
Example — Johnson & Johnson (JNJ):
ROE: 18%
Payout Ratio: 45%
Retention (b): 1 − 0.45 = 0.55
SGR = 18% × 0.55 = 9.90% per year
Interpretation: JNJ can grow its dividend at up to 9.90%/yr
indefinitely — purely from reinvested earnings — without
borrowing, issuing new shares, or depleting reserves.
Actual 5-year DGR: 6.00%
Gap: 6.00% − 9.90% = −3.90% (actual is BELOW sustainable ceiling)
Status: ✅ Well Within Limits
Where to find the inputs
| Input | Where to Find It | Notes |
|---|---|---|
| ROE (%) | Annual report, financial data sites (YFinance, Macrotrends, Morningstar) | Use TTM (trailing twelve months) or most recent fiscal year. Average last 3 years for stability. |
| Payout Ratio (%) | Calculated from DPS ÷ EPS, or found directly on most financial sites | Use EPS-based payout for most companies; use FFO-based for REITs |
| Actual DGR (5yr) | Dividend history on broker platforms, Seeking Alpha, Simply Safe Dividends | 5-year CAGR of dividends per share is the most reliable comparison |
The retention ratio — what it tells you
The retention ratio (b) is the fraction of earnings kept inside the business rather than paid out as dividends. A company with a 45% payout ratio retains 55% of earnings — that retained capital is the fuel for organic growth. Higher retention means more reinvestment capacity; lower retention (high payout) means less fuel available for sustainable growth.
This creates an inherent tension in dividend investing: the more income a company pays today (high payout), the less it can grow that income over time (lower SGR). The optimal balance depends on ROE — a high-ROE company can have a generous payout and still grow rapidly because each dollar retained generates exceptional returns.
Payout Ratio (%)
ROE (%) | 30% | 45% | 60% | 75% | 90%
------------------------------------------------------
10% | 7.0% | 5.5% | 4.0% | 2.5% | 1.0%
15% | 10.5% | 8.25% | 6.0% | 3.75% | 1.5%
18% | 12.6% | 9.90% | 7.2% | 4.5% | 1.8%
25% | 17.5% | 13.75% | 10.0% | 6.25% | 2.5%
35% | 24.5% | 19.25% | 14.0% | 8.75% | 3.5%
Key insight: A low-ROE company with a high payout ratio
has almost no sustainable growth capacity. A high-ROE company
can maintain generous dividends AND strong sustainable growth.
What SGR Means — Interpreting the Number
SGR is not a target — it is a ceiling. It represents the maximum long-run dividend growth rate that can be sustained purely from internal earnings generation. Here is how to interpret different SGR levels in the context of dividend analysis:
| SGR Level | Business Implication | Ideal For |
|---|---|---|
| ≥ 10% | Strong internal growth engine — high ROE and/or moderate payout. Dividend can grow at inflation-beating rate indefinitely. | Long-term dividend growth investors |
| 6–10% | Healthy sustainable growth — adequate ROE and balanced payout. Dividend growth outpaces inflation with room to spare. | Balanced income + growth investors |
| 3–6% | Modest sustainable growth — either low ROE or high payout limits internal capacity. Dividend growth roughly matches inflation. | High-income investors (utilities, telecoms) |
| < 3% | Very limited growth capacity — high payout consuming most earnings, low ROE, or both. Dividend stability depends on earnings not declining. | Current income only — careful monitoring required |
SGR by itself does not mean a dividend is safe or unsafe — it means the dividend can grow at that rate sustainably. A company with a 3% SGR and a 6% actual DGR has a problem. A company with a 3% SGR and a 2% actual DGR is fine — growing slowly but within its means. The comparison between SGR and actual DGR is where the real analytical value emerges.
SGR vs Actual DGR — The Most Important Comparison
The single most actionable insight from SGR analysis comes from comparing it against the company's actual 5-year dividend growth rate (DGR). This comparison reveals whether dividend growth is being generated from genuine business performance or from financial engineering that cannot continue indefinitely.
Gap = Actual DGR − SGR
If Gap is NEGATIVE (Actual < SGR):
→ Dividend is growing BELOW the sustainable ceiling
→ Company retains capacity for future growth acceleration
→ Status: Well Within Limits / Healthy
If Gap is near ZERO (Actual ≈ SGR):
→ Dividend is growing at exactly the sustainable pace
→ No buffer — any ROE decline creates strain
→ Status: At SGR Ceiling — monitor closely
If Gap is POSITIVE (Actual > SGR):
→ Dividend is growing FASTER than the business can sustain
→ Payout ratio must be expanding each year
→ Eventually requires: DGR slowdown, freeze, or CUT
→ Status: Unsustainable — risk of dividend cut
Example — JNJ:
SGR = 9.90% | Actual DGR = 6.00%
Gap = 6.00% − 9.90% = −3.90%
→ Well Within Limits: 3.9% annual growth headroom
| Gap (Actual − SGR) | Sustainability Assessment | Action |
|---|---|---|
| −5% or better | Well Within Limits — large safety margin | Hold confidently; monitor annually |
| −1% to −5% | Near SGR Ceiling — modest buffer remaining | Watch for ROE deterioration or payout increases |
| 0% to +2% | Borderline — growing slightly above sustainable rate | Acceptable if ROE is improving; otherwise flag for review |
| +2% to +5% | Slightly Unsustainable — payout ratio expanding | Monitor payout trend; expect DGR slowdown within 3–5 years |
| > +5% | Significantly Unsustainable — high cut risk | Reduce position weight; dividend cut is a likely outcome |
What Happens When Dividends Grow Faster Than SGR
When a company consistently grows its dividend above the SGR, the payout ratio must rise each year. This is mathematically unavoidable — if dividends grow faster than earnings can grow, dividends consume an increasingly large share of those earnings. Tracing this trajectory reveals the endgame:
Company: ROE 12%, starting payout 55%, SGR = 12% × 0.45 = 5.4%/yr
Actual DGR = 9%/yr (SGR gap = +3.6%)
Assume EPS grows at SGR (5.4%/yr), dividends grow at 9%/yr:
Year | EPS | DPS | Payout Ratio
0 | $5.00 | $2.75 | 55.0%
3 | $5.86 | $3.56 | 60.8%
6 | $6.87 | $4.62 | 67.2%
9 | $8.06 | $5.98 | 74.2%
12 | $9.45 | $7.75 | 82.0%
15 | $11.07 | $10.04 | 90.7% ← critical zone
17 | $12.24 | $11.93 | 97.5% ← essentially 100%
At year 17, the company is paying out nearly ALL earnings.
Any EPS miss triggers a cut. At year 18–19, EPS growth
cannot fund a 9% dividend increase — the dividend MUST
be cut, frozen, or the company must borrow to maintain it.
This is not a hypothetical — it is the exact mechanism behind
most surprise dividend cuts in dividend-growth stocks.
The critical insight is that payout ratio expansion is invisible in the short term. A rising payout ratio looks fine at 60%, 65%, even 70% — until it suddenly does not. By the time most investors notice, the cut is inevitable. SGR analysis catches this trend years before it becomes a crisis.
Dividend Safety Score — Five Dimensions Beyond SGR
SGR captures one dimension of dividend sustainability — the growth capacity constraint from ROE and retention. But a complete dividend safety assessment requires four additional dimensions that SGR alone does not measure:
1. EPS Coverage (25 points)
EPS Coverage = EPS / DPS. How many times does earnings-per-share cover the annual dividend? Above 2× is comfortable; above 3× is strong. Below 1.5× means any earnings shortfall risks the dividend. Below 1× means the company is paying out more than it earns — an unsustainable position. This is the most direct measure of whether earnings actually support the current payment.
2. FCF Coverage (25 points)
Free cash flow coverage = FCF per share / DPS. For capital-intensive businesses, FCF is more reliable than EPS because it accounts for the actual cash generated after maintaining and growing assets. A company can show positive EPS while generating negative FCF if capital expenditure is high — and dividends are paid in cash, not accounting earnings. FCF coverage above 2× is strong; below 1× means the dividend is being funded by debt or asset sales.
3. Balance Sheet Strength (20 points)
Debt-to-equity ratio measures financial leverage. A highly leveraged company has less flexibility — during a downturn, debt service obligations compete directly with dividend payments. D/E below 0.5× signals a fortress balance sheet with ample capacity to maintain dividends through adversity. D/E above 2× signals that dividends are at risk if earnings soften.
4. Dividend Streak (15 points)
The number of consecutive years a company has paid (and ideally raised) dividends is a proven proxy for management commitment and business durability. Companies maintaining dividends through multiple economic cycles — 2001, 2008, 2020 — have demonstrated that their dividend is a genuine financial priority, not a discretionary expenditure to be cut in adversity. Dividend Aristocrats (25+ years) and Dividend Kings (50+ years) earn the highest streak scores.
5. ROE Quality (15 points)
ROE reflects how efficiently management converts shareholders' equity into profits. Consistently high ROE (above 18–20%) indicates a durable competitive advantage — pricing power, brand strength, or network effects — that protects earnings through economic cycles. Low ROE businesses have thinner margins for error when earnings inevitably disappoint.
| Safety Score | Grade | Dividend Risk Assessment |
|---|---|---|
| 85–100 | Excellent | Extremely well-supported across all five dimensions. Cut risk is very low under all but catastrophic scenarios. |
| 70–84 | Good | Well-covered with solid fundamentals. Minor improvements possible but cut risk is low under normal conditions. |
| 50–69 | Moderate | Adequately covered but with areas of concern. Monitor for deteriorating trends in coverage or leverage. |
| 30–49 | Weak | Multiple metrics thin. Dividend is at elevated risk if earnings disappoint or debt increases. |
| < 30 | Danger | Critical metrics failing. Dividend cut is likely unless fundamentals improve materially. |
- EPS Coverage: 9.80 / 4.76 = 2.06× → 20/25 pts
- FCF Coverage: 8.50 / 4.76 = 1.79× → 14/25 pts
- D/E = 0.55 → 16/20 pts
- Streak: 62 consecutive years → 15/15 pts
- ROE: 18% → 12/15 pts
→ Total: 77/100 — Good — Dividend well-supported. Risk of cut is low.
Projecting Income at the Sustainable Rate
Once you know the SGR, you can project what the dividend will be over any time horizon and compare it against what the actual historical DGR would produce. This comparison is essential for long-term income planning because it shows which growth rate is the credible long-run path.
Formula: Dividend at Year N = D₀ × (1 + g)ᴺ
JNJ Example (D₀ = $4.76, 200 shares, price $158):
At SGR (9.9%/yr) over 10 years:
D₁₀ = $4.76 × (1.099)¹⁰ = $4.76 × 2.5700 = $12.23/sh
Yield on Cost = $12.23 / $158 = 7.74%
Annual Income = $12.23 × 200 = $2,446/yr
At Actual DGR (6%/yr) over 10 years:
D₁₀ = $4.76 × (1.06)¹⁰ = $4.76 × 1.7908 = $8.52/sh
Yield on Cost = $8.52 / $158 = 5.39%
Annual Income = $8.52 × 200 = $1,704/yr
Divergence at Year 10: $12.23 − $8.52 = $3.71/sh
Insight: If JNJ accelerates toward its SGR ceiling (9.9%),
annual income from 200 shares would reach $2,446 vs $1,704
at the historical 6% rate — a $742/yr difference from
the same initial investment.
Yield on Cost grows from 3.01% today to:
7.74% in 10 years (at SGR)
5.39% in 10 years (at actual DGR)
This projection makes the power of sustainable high-growth dividends immediately visible. A company with SGR of 9.9% that chooses to grow at its ceiling produces dramatically more income over 10 years than one growing at the historical 6% — from the same initial cost. This is why dividend growth rate matters as much as current yield for long-term investors.
Valuing a Stock Using the Sustainable DDM
The Gordon Growth Model values a stock as the present value of all future dividends growing at a constant rate. Using the SGR as the growth rate — rather than the historical DGR — produces a more conservative and theoretically grounded intrinsic value estimate.
IV (at SGR) = D₁ / (r − SGR)
Where D₁ = D₀ × (1 + SGR)
r = required return (WACC or hurdle rate)
SGR must be strictly less than r
IV (at Actual DGR) = D₁_actual / (r − Actual DGR)
JNJ Example (D₀=$4.76, SGR=9.9%, Actual DGR=6%, r=11%):
IV at SGR:
D₁ = $4.76 × 1.099 = $5.231
IV = $5.231 / (0.11 − 0.099) = $5.231 / 0.011 = $475.57
IV at Actual DGR:
D₁ = $4.76 × 1.06 = $5.046
IV = $5.046 / (0.11 − 0.06) = $5.046 / 0.050 = $100.91
Market Price: $158.00
Margin of Safety vs SGR IV: ($475.57 − $158) / $475.57 = +66.8%
Margin of Safety vs Actual IV: ($100.91 − $158) / $100.91 = −56.6%
Key observation: The spread between SGR and r (11% − 9.9% = 1.1%)
is very narrow — small changes in r dramatically affect the SGR-based IV.
Widen r to 12%: IV = $5.231 / 0.021 = $249 (more reasonable)
Always test multiple r values using the IV vs required return chart.
The sustainable DDM reveals an important insight: the valuation is extremely sensitive to the spread between the required return and the sustainable growth rate. When SGR is close to r (as in the JNJ example with a 1.1% spread), even small changes in r produce large swings in intrinsic value. This is why the IV vs required return sensitivity chart — which shows how intrinsic value changes as r varies — is more informative than a single point estimate.
The optional two-stage DDM allows for a transition period where the dividend grows at the actual historical DGR for several years before converging to the SGR in the long run — useful for companies that are currently growing above or below their sustainable rate but expected to normalize over time.
Practical Applications of SGR in Portfolio Management
1. Pre-purchase screening
Before buying any dividend stock, calculate the SGR and compare it to the announced or historical DGR. If actual DGR exceeds SGR by more than 2–3%, investigate why and whether management has a credible plan to improve ROE or reduce the payout to a sustainable level. Entering a position where the dividend is clearly growing above the sustainable rate means you are accepting the risk of a future cut.
2. Portfolio-wide sustainability review
Apply the SGR comparison to every holding in your portfolio simultaneously using the Compare tab. This gives an immediate view of which positions are growing sustainably and which have payout ratios that are quietly expanding toward unsustainable levels. An annual review of SGR vs actual DGR across all holdings is one of the most valuable maintenance exercises for a dividend portfolio.
3. Early warning for dividend cuts
Dividend cuts almost never happen suddenly. They are typically preceded by years of payout ratio expansion — exactly what a widening SGR gap reveals. Using SGR analysis to flag positions where actual DGR has exceeded SGR for 3+ consecutive years allows you to reduce or exit before the cut is announced, avoiding both the income loss and the price decline that accompanies most dividend cuts.
4. Comparing companies across sectors
SGR is a particularly useful cross-sector comparison tool because it normalizes for differences in business model. A utility company with ROE of 10% and payout of 70% has an SGR of 3% — which is appropriate for its regulated, stable-but-slow-growth business. A consumer staples company with ROE of 25% and payout of 60% has an SGR of 10% — much higher growth capacity despite a similar payout ratio. Comparing SGR puts both on equal footing.
5. Dividend growth stock valuation
The sustainable DDM provides a theoretically grounded intrinsic value that avoids the optimism bias of using above-average historical DGRs as the long-run growth assumption in the Gordon model. Using SGR as the long-run growth rate anchors the valuation in what the business can actually generate — not what management has promised or what recent years have produced.
How to Use Our Sustainable Dividend Growth Calculator Pro
Our Sustainable Dividend Growth Calculator Pro applies all five dimensions of SGR analysis in one integrated tool. Here is how to use each tab:
Tab 1: SGR Calculator — Calculate and compare sustainable growth
Enter ROE, payout ratio, and optionally current dividend, actual 5-year DGR, EPS, and FCF per share. The calculator instantly shows:
- Sustainable growth rate (SGR = ROE × Retention)
- Retention ratio auto-calculated from payout
- Gap between actual DGR and SGR with sustainability verdict
- EPS and FCF coverage of the dividend
- Automated insight explaining whether growth is within sustainable limits
- Bar chart comparing SGR, actual DGR, payout and retention ratios
- ROE: 18% | Payout: 45% → SGR: 9.90%/yr
- Actual DGR: 6% | Gap: −3.90% | EPS Cov: 2.06×
→ Verdict: ✅ Well Within Limits — 3.9% annual growth headroom above actual DGR
Tab 2: Safety Score — Five-dimension dividend safety rating
Enter EPS, DPS, FCF per share, debt-to-equity, ROE, dividend streak, and 5-year DGR. Results show:
- Safety score out of 100 with grade from Excellent to Danger
- Visual component bars showing points earned vs maximum per dimension
- Grade text explaining what the score implies for cut risk
- Radar chart visualizing all five components simultaneously
- EPS 9.80, DPS 4.76, FCF 8.50, D/E 0.55, ROE 18%, Streak 62yr
→ Score: 77/100 — Good | EPS 20 + FCF 14 + D/E 16 + Streak 15 + ROE 12 = 77
Tab 3: Growth Projection — Compare SGR vs actual DGR paths
Enter current dividend, SGR, actual DGR, shares owned, years, and current price. Results show:
- Projected dividend per share at both SGR and actual DGR at end of period
- Divergence between the two paths
- Yield on cost and annual income under each scenario for your share count
- Dual-line chart showing both dividend growth paths year by year
- SGR path: $12.23/sh → $2,446/yr → 7.74% YoC
- Actual path: $8.52/sh → $1,704/yr → 5.39% YoC
→ Divergence: +$3.71/sh at SGR vs actual — $742/yr more income at sustainable ceiling
Tab 4: Valuation — Intrinsic value via sustainable DDM
Enter D₀, SGR, required return (r), optional actual DGR, market price and transition years. Results show:
- Intrinsic value at SGR (primary estimate) and at actual DGR (comparison)
- Margin of safety vs market price under each growth assumption
- Spread (r − SGR) and implied yield at intrinsic value
- IV vs required return sensitivity chart for both growth rates plus market price
- IV at SGR (9.9%): $475.57 | MoS: +66.8%
- IV at Actual (6%): $100.91 | MoS: −56.6%
→ Note: SGR IV is highly sensitive to spread (r − SGR = 1.1%). Use chart to test r = 12%: IV ≈ $249
Tab 5: Compare — Side-by-side across multiple companies
Add up to 8 companies with ROE, payout, actual DGR, EPS, and DPS. Each row auto-calculates SGR, actual vs SGR gap, EPS coverage and sustainability badge. Summary shows most sustainable dividend, average SGR, and count of at-risk companies. Grouped bar chart shows SGR vs actual DGR side by side for all companies.
- JNJ: ROE 18%, Payout 45% → SGR 9.90%, Actual 6% → ✅ Sustainable
- PG: ROE 32%, Payout 62% → SGR 12.16%, Actual 5% → ✅ Sustainable
- MCD: ROE 180%, Payout 70% → SGR 54.00%, Actual 8% → ✅ Sustainable
→ All sustainable | Avg SGR: 25.35% | Most Sustainable: MCD (highest SGR vs actual margin)
Common Mistakes When Analyzing Dividend Sustainability
Using a single year of ROE
ROE is volatile — a one-time write-off or a particularly strong year can push it far from the long-run average. Always use a 3-year or 5-year average ROE for SGR calculations to smooth out cyclical distortions. A company with ROE of 25% last year but an average of 14% over five years has a more realistic SGR around 14% × retention — not 25%.
Ignoring the payout ratio trend
Checking SGR once is useful. Tracking whether the payout ratio is rising, stable or falling over time is essential. A company with a 50% payout ratio today that has risen from 35% five years ago is showing exactly the payout expansion pattern that precedes a dividend cut — even if today's SGR still appears adequate.
Applying the formula without adjusting for REITs
Standard EPS-based SGR analysis does not work for REITs because REIT earnings are distorted by large depreciation charges that reduce reported EPS without reducing actual cash generation. For REITs, use FFO (Funds From Operations) per share instead of EPS for coverage calculations, and adjust the payout ratio accordingly. The FCF coverage metric in the Safety Score tab is more appropriate for REIT analysis.
Confusing high SGR with a good dividend stock
McDonald's has an SGR of 54% because of its extraordinary ROE (driven by franchise model leverage creating very low book equity). This does not mean MCD's dividend is 54 times better than a company with a 9% SGR. What matters for dividend investing is the combination of current yield, actual DGR, dividend safety score, and whether growth is within the sustainable ceiling — not the ceiling itself in isolation.
Treating the SGR as a target rather than a ceiling
Management teams should not aim to grow dividends at the SGR — they should grow dividends sustainably below the SGR to maintain a buffer. Companies that grow right at the SGR have no margin for ROE decline, payout flexibility, or earnings volatility. The best dividend growers grow meaningfully below their SGR, maintaining a persistent cushion that protects the dividend through adversity.
Frequently Asked Questions
What is sustainable dividend growth rate (SGR)?
Sustainable Dividend Growth Rate (SGR) is the maximum rate at which a company can increase its dividend without eroding financial health, requiring external financing, or forcing the payout ratio above sustainable levels. Formula: SGR = ROE × Retention Ratio = ROE × (1 − Payout Ratio). A company with ROE of 18% and payout ratio of 45% has an SGR of 9.9%/yr — meaning it can grow its dividend at up to 9.9% per year indefinitely from retained earnings alone.
What does it mean when actual DGR exceeds SGR?
When actual dividend growth rate exceeds SGR, the payout ratio must expand each year — the company is paying out a growing fraction of earnings as dividends. This is sustainable for a few years but eventually pushes the payout ratio so high that any earnings shortfall triggers a cut. Companies consistently growing dividends 3–5% above their SGR are showing an early warning pattern for a future dividend cut. Our SGR Calculator flags this automatically.
What is a good SGR for a dividend stock?
SGR above 8–10%/yr is strong — it allows meaningful dividend growth well above inflation from internal earnings generation. SGR of 5–8%/yr is healthy for a balanced income and growth approach. SGR of 3–5%/yr is typical for high-yield sectors like utilities — adequate for stable income but limited growth. The absolute level matters less than the comparison against actual DGR — a 5% SGR with 3% actual DGR is safe; a 10% SGR with 12% actual DGR has a problem.
How do you calculate sustainable dividend growth rate?
SGR = ROE × (1 − Payout Ratio). Step 1: Find ROE from the latest annual report or financial data site (Net Income / Shareholders' Equity × 100). Step 2: Calculate payout ratio (DPS / EPS × 100). Step 3: Subtract payout ratio from 100% to get retention ratio. Step 4: Multiply ROE by retention ratio. Example: ROE 18%, payout 45% → retention 55% → SGR = 18 × 0.55 = 9.9%/yr.
Is sustainable dividend growth the same as internal growth rate?
Essentially yes. The Internal Growth Rate in corporate finance is defined as ROE × Retention Ratio — which is the same formula as SGR. Some texts define a slightly different version called the "sustainable growth rate" that incorporates financial leverage (using ROE based on total assets rather than equity), but for dividend analysis the simpler ROE × retention formulation is the standard and most widely used approach.
How is intrinsic value calculated using the sustainable DDM?
Intrinsic Value = D₁ / (r − SGR), where D₁ = D₀ × (1 + SGR) and r is the required return. This is the Gordon Growth Model using SGR as the perpetual growth rate instead of the historical DGR. The result is a more conservative estimate because SGR is grounded in what the business can generate from internal earnings — not management's dividend growth announcement. The spread (r − SGR) must be positive; the smaller the spread, the more sensitive the valuation to changes in r.
Is this sustainable dividend growth calculator free?
Yes. The Sustainable Dividend Growth Calculator Pro on StockToolHub is completely free with no registration, account, or subscription required. All five tabs — SGR Calculator, Safety Score, Growth Projection, Valuation, and Compare — are fully accessible.
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