PEGY Ratio Formula: How to Calculate It Step by Step

The Formula

The PEGY ratio formula is:

PEGY = P/E ÷ (EPS Growth Rate + Dividend Yield %)

Three inputs. One output. The output is a ratio that tells you whether the price you're paying for a stock is above or below the value implied by the stock's combined earnings growth and dividend yield.

Peter Lynch introduced this formula in One Up on Wall Street (1989) as an extension of the PEG ratio for dividend-paying stocks. The underlying logic: for income investors, a dollar of dividend return is economically equivalent to a dollar of earnings growth. Both forms of return should count when assessing whether a stock is cheap or expensive.

Input 1: P/E Ratio (Price-to-Earnings)

The P/E ratio is the stock's current price divided by its earnings per share (EPS).

P/E = Current Stock Price ÷ Earnings Per Share

For PEGY calculations, use trailing twelve-month (TTM) P/E — the ratio based on the last four quarters of reported earnings. This is the standard because it uses actual reported numbers, not analyst estimates.

Some analysts prefer forward P/E (based on next-twelve-month earnings estimates). Either works, but be consistent across your comparison set. Mixing TTM P/E for some stocks and forward P/E for others produces misleading comparisons.

P/E is available on any financial data platform (Yahoo Finance, Fidelity, TD Ameritrade, Bloomberg). For the PEGY calculation, you need the number — you don't need to recalculate it from price and EPS each time.

Input 2: EPS Growth Rate

The EPS growth rate is the annualized rate at which the company's earnings per share are expected to grow, expressed as a percentage.

For PEGY, use the 3–5 year forward consensus EPS growth estimate. This is the average of analyst estimates for long-term earnings growth, available on platforms like:

• Yahoo Finance (under "Analysis" → "Growth Estimates" → "Next 5 Years (per annum)")
• Fidelity Research (under Earnings Estimates)
• Morningstar (Fair Value and Estimates section)
• Simply Wall St

Express the growth rate as a whole number percentage: 8, not 0.08. If analysts project 8% annual EPS growth over the next 5 years, the input is 8.

What to avoid: Don't use trailing EPS growth (what the company has grown in the past). PEGY is a forward-looking valuation tool. The question is not what the company has done, but what the market is pricing in versus what the stock should be worth given expected future returns.

Input 3: Dividend Yield %

The dividend yield is the annual dividend per share divided by the current stock price, expressed as a percentage.

Dividend Yield % = (Annual Dividend Per Share ÷ Current Stock Price) × 100

If a stock pays $2.00 per share annually and trades at $50, the dividend yield is 4.0%.

For PEGY, use the current forward yield — annualized based on the most recent quarterly dividend. Most financial platforms display this as the standard dividend yield figure.

Express as a whole number: 4.0, not 0.04. This matters for the formula — the EPS growth rate and dividend yield must be in the same units (both as percentage points, not decimals) for the denominator to be calculated correctly.

Worked Example: AbbVie ($ABBV)

AbbVie is one of the most widely held dividend stocks in income portfolios. Here's a PEGY calculation using illustrative figures representative of its typical profile:

• Current price: $162
• TTM EPS: $10.85
• P/E: 162 ÷ 10.85 = 14.9
• 5-year forward EPS growth estimate: 7%
• Annual dividend: $6.56/share
• Dividend yield: 6.56 ÷ 162 × 100 = 4.0%

PEGY = 14.9 ÷ (7 + 4.0) = 14.9 ÷ 11.0 = 1.35

A PEGY of 1.35 puts $ABBV in the Fair Value zone — paying a modest premium relative to what the growth + yield math justifies. If the price fell to $140:

P/E = 140 ÷ 10.85 = 12.9
Dividend Yield = 6.56 ÷ 140 × 100 = 4.7%
PEGY = 12.9 ÷ (7 + 4.7) = 12.9 ÷ 11.7 = 1.10

Still Fair Value, but closer to the Buy threshold. At $120:

P/E = 120 ÷ 10.85 = 11.1
Dividend Yield = 6.56 ÷ 120 × 100 = 5.5%
PEGY = 11.1 ÷ (7 + 5.5) = 11.1 ÷ 12.5 = 0.89

Now in the Buy zone. The math is saying the combined growth and yield return justifies the price — and then some.

Worked Example: Altria ($MO)

Altria is an extreme case — very high yield, low growth — that illustrates how PEGY corrects the PEG ratio's blindspot:

• P/E: 9.5
• 5-year EPS growth estimate: 2%
• Dividend yield: 9.2%

PEG  = 9.5 ÷ 2   = 4.75  (looks extremely overvalued)
PEGY = 9.5 ÷ (2 + 9.2) = 9.5 ÷ 11.2 = 0.85  (Buy zone)

PEG says Altria is nearly 5x overvalued. PEGY says it's reasonably attractive. The difference: PEG ignores the 9.2% cash return investors receive every year. PEGY counts it. For an income investor, 9.2% annual cash yield on a stock growing earnings at 2% is fundamentally different from a 2%-yield stock growing earnings at 9.2% — and PEGY captures that difference.

Common Calculation Errors

Mixing decimals and percentages. The most common error. EPS growth rate and dividend yield must both be expressed as percentage numbers (8, 4.2) — not decimals (0.08, 0.042). If you mix formats, your denominator will be wrong by a factor of ~100.

Wrong P/E. Negative P/E (loss-making companies), P/E greater than 100 (companies with near-zero earnings), or N/A P/E (no earnings) all produce unreliable PEGY scores. PEGY works best on profitable companies with stable earnings. Exclude stocks with P/E above 50 or below 5 from standard comparisons.

Using trailing growth rate instead of forward estimate. PEGY is a forward-looking tool. A company that grew EPS at 15% per year over the past 5 years but is now expected to grow at 4% (due to maturing product lines, patent cliff, etc.) should be evaluated at 4%, not 15%.

Ignoring dividend sustainability. The formula takes dividend yield at face value. If the dividend is about to be cut, the yield in your calculation will be higher than the sustainable yield going forward, making the stock look cheaper than it is. Always check payout ratio alongside the PEGY calculation.

Quick Reference: PEGY Zones

When PEGY Doesn't Apply

The PEGY formula produces unreliable results for:

• Non-dividend payers: With yield = 0, PEGY reduces to PEG. Use PEG directly for growth stocks.
• Negative earnings: P/E is undefined for loss-making companies. PEGY cannot be calculated.
• REITs: Real estate investment trusts use FFO (funds from operations), not EPS, as the primary earnings metric. Calculating PEGY with EPS on a REIT produces a distorted number. Use price-to-FFO instead.
• Financials with complex capital structures: Banks and insurance companies have earnings metrics that don't translate cleanly to EPS-based growth estimates. PEGY can still be used as a rough screen but requires additional context.

For the sweet spot — dividend-paying stocks in healthcare, consumer staples, utilities, industrials, and energy — PEGY is the cleaner, more honest valuation tool than PEG or P/E alone.