Can a dividend-paying company still grow?
The second thing to keep in mind is a company’s long-term sustainable growth rate. A company grows based on how much it reinvests and the quality of its investments. Companies that pay out dividends have less capital to reinvest; therefore, their long-term sustainable growth rate is expected to be less than the return on equity. As the payout ratio increases, the chance for price appreciation decreases, along with the diminishing expected growth rate: Expected Long-Term Sustainable Growth Rate = (1 – Payout Ratio) * (Return on Equity) As an example, let’s assume that a company pays out 60% of its earnings in dividends and currently generates a 12% return on equity. Assuming this trend continues, the expected long-term sustainable growth rate would be (1 – 0.60) multiplied by 0.12 = 4.8%. Investors seeking both price appreciation and dividends need to make sure that the company can still grow earnings. It is unreasonable to assume that companies with large dividend payouts can grow at d
