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Growing perpetuity refers to the situation in which the value of a stream of income demonstrates a noticeable upward and consistent trend over successive annual periods. In terms of investments, this often translates into a situation where the anticipated annual return on the investment is consistently reached and even exceeded from one year to the next. The concept also implies that this steady cash flow will continue for the foreseeable future, if the investor chooses to hold on to the asset over a period of many years.
There are a number of reasons why a growing perpetuity is desirable. The most apparent is the ongoing income stream that is dependable from one calendar year to the next. This degree of financial security makes it much easier to set goals for the future, planning specific events to take place at a given point in time. For example, if the stocks owned by a given investor exhibit the trait of continuing to increase in value in perpetuity, it is much easier to determine when the investor should consider the purchase of a new home, or make some other type of major purchase, using the dividends earned from the stocks.
Assessing the potential for growing perpetuity is often very important to investors who wish to acquire a given investment with an eye toward holding onto that investment for a number of years. Ideally, the security will have some degree of history that indicates as stable and consistent upward movement from year to year. Assuming that the nature of the corporation that issues the security is such that it is not likely to fall out of favor in the near future, and the return continues to increase from year to year, an investment of this type can form a solid basis for any investment portfolio.
Part of the process of accurately assessing the presence of growing perpetuity from year to year involves making allowances for changes in the general status of the economy. This means it may be necessary to adjust the figures of a given year in order to compensate for inflation. Doing so makes it easier to understand if real growth did occur, or if what was apparently growth on the surface was in fact a loss, as far as the buying power of the return generated by the investment.
While investments with a low rate of volatility are likely to exhibit a modest degree of growing perpetuity, it is also possible for stocks that are considered to be higher risks to demonstrate this trait. As long as the stock continues to increase in value over the years, and the condition of the economy is projected to encourage that growth over the long term, it could be said that this more volatile stock does exhibit growing perpetuity. However, careful assessment must be undertaken before deciding that any given asset, regardless of the level of risk involved, actually demonstrates this trait. This means looking over the history and projecting the future movement of the stock for more than just a few years in each direction.
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