I understand that Sustainable Growth Rate (SGR) = ROE * (1 - dividend payout rate), <> so wouldn’t the Dividend Growth Rate = ROE * dividend payout rate ? Schweser says no, that it is ROE * (retention rate). Is this a mistake?
No it makes sense, look again at what you wrote.
The key is to understand that Dividend Growth Rate is equal to the Sustainable Growth Rate and both of them are proportional to growth of equity since ROE and retention rate are considered constant (DividentPaid = Income*DividentPayoutRate = Equity*ROE*DividentPayoutrate, Equity_new = Equity_old*(1+ROE)-DividentPaid = Equity_old*ROE*RetentionRate). How does your equity grow - it grows from reinvesting what you’ve made, as a results of that your dividents grow because they are proportional to equity. If you retention rate is zero (devident payout rate = 1) then your equity doesn’t increase and as a result your dividents don’t increase.
Thanks Maratikus - that makes sense