Inflation, risk, and dividend growth

In this paper, we examine the theoretical relationship between inflation, risk, and dividend growth. Our model development is based on the standard definition of the expected real dividend growth rate. Our first result indicates that the expected dividend growth of a firm is positively and linearly related to its inflation-dividend beta (obtained from the covariance between the inflation rate and the company’s dividend growth rate). Our second result demonstrates that this relationship can easily be extended to a multifactor model, using the different factors that influence inflation. Our third result shows that the latter relationship can also be extended to a long-run projection. These findings suggest that inflation affects dividends. The findings also suggest that risk, estimated with dividends, inflation and economic factors, influences dividend growth rates, in the short and long-run.