How to Calculate an Expected Growth Rate Using Constant Growth

by Mark Kennan

When deciding on stocks to purchase for your portfolio, you want to be able to estimate the potential returns. If you expect the stock to continue to grow by the amount it grew in the previous year, you can calculate the expected growth rate so that you can figure the rate of growth to use over a longer period of time. To calculate the expected growth rate, you need to know the initial price, final price and the dividends paid during the year.

Subtract the starting price of the stock from the ending price to find the gain or loss. For example, if the price started the year at $66 and ended the year at $70, it gained $4.

Add the dividends to the change in price to calculate the growth after dividends. In this example, if the stock paid $1.50 in dividends, add $1.50 to $4 to find the total gain equals $5.50.

Divide the total gain by the initial price to find the rate of expected rate of growth, assuming the stock continues to grow at a constant rate. In this example, divide $5.50 by $66 to get a 0.083 growth rate, or about 8.3 percent.

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