Why does the Dividends Future Values Prediction decrease when I increase the Stock Growth Rate?
We use dividend reinvestment as part of our calculation. When you reinvest dividends, the dividends you receive are used to buy more shares of the stock. The number of additional shares you can purchase depends on the current stock price. Here's how it works:
- Higher Stock Growth Rate: When the stock growth rate increases, the stock price rises more quickly over time.
- Fewer Shares Purchased: As the stock price increases, each dividend payment buys fewer shares because each share is more expensive.
- Reduced Compounding Effect: With fewer shares being purchased with each dividend payment, the compounding effect (where dividends generate more dividends) is reduced over time.
To illustrate:
- Lower Growth Rate: If the stock price grows slowly, dividends can buy more shares because the stock price remains relatively low. This means you accumulate more shares over time, which in turn generates more dividends.
- Higher Growth Rate: If the stock price grows quickly, each dividend payment buys fewer shares. This means you accumulate fewer shares over time, resulting in fewer dividends being generated in the future.
Therefore, even though a higher stock growth rate sounds positive, it actually leads to fewer shares being purchased with reinvested dividends. This is why the predicted future dividend returns decrease as the stock growth rate increases.