Many stocks offer fixed dividend payments as a way to distribute earnings to shareholders. A "fixed" dividend does not imply an unchanging dividend. A fixed dividend pays a set amount over one or more years, but the dividend payout is still expected to increase over time. The dividend payout, along with the anticipated dividend growth rate and the stock's expected return, predicts the stock's current price under the constant growth model.
1. Contact your stock broker and ask for the stock's dividend payout, expected return and dividend growth rate.
2. Subtract the dividend growth rate from the stock's expected return. As an example, if stock XYZ had an expected return of 8 percent, and it's dividend growth rate was 3 percent, then you would calculate 5 percent.
3. Divide this percentage by 100 to convert it into decimal format. In the example, this converts 5 percent to 0.05.
4. Divide the annual dividend payout by this figure to calculate the stock price. In the example, if stock XYZ offered $2 annual dividends, then divide $2 by 0.05 to calculate a stock price of $40 per share. If the stock is currently selling below this amount, it is considered a bargain. If it is selling above this amount, then is is overvalued.