Final answer:
Under the constant growth dividend model, the stock price is expected to grow at the same rate as the dividends, which is true if all other economic factors remain constant (ceteris paribus). However, real-world data shows variations, with dividends fluctuating over times and capital gains sometimes outpacing dividend growth.
Step-by-step explanation:
The student's question about whether the stock price grows at the same rate as the dividends under the constant growth dividend model (ceteris paribus) is looking to understand the principles of financial valuation of stocks. According to the constant growth dividend model, also known as the Gordon Growth Model, it is true that under certain conditions, the stock price is expected to grow at the same rate as the dividends. The key condition here is ceteris paribus, meaning that all other economic factors remain constant.
The assumptions of this model are crucial; it assumes that dividends will continue to grow at a constant rate indefinitely. This growth rate is supported by earnings and by extension, the earnings growth rate. If the company's dividends grow at a particular rate, the stock price should also increase at that rate to offer the required rate of return to the investors, maintaining the valuation balance.
However, historical data shows that dividends have not always consistently grown at the same rate as stock prices. As explained in the referenced material, dividends as a percentage of stock value have varied, typically lying between 1% to 4% depending on the decade, and there have been periods where capital gains far outstripped the growth in dividends. Therefore, while the model is useful as a theoretical construct, the actual stock market conditions may lead to deviations from the model's predictions.