Here is the dividend forecast for Rolls-Royce shares

In the last two years, Rolls Royce (LSE:RR) shares are up 540%. Just think. A £10,000 investment during Liz Truss’s ill-fated tenure as prime minister would be worth £64,000 today.

But there is another piece of good news for Rolls-Royce shareholders: investors do not need to sell their shares to get the return on their shares.

In the company's first-half results, management said it was looking to reinstate its dividend and that more information would be shared in full-year results.

So what might this dividend look like?

The dividend forecast

Rolls-Royce hasn't paid a dividend in four years, so investors shouldn't expect anything too exciting from the civil aviation and defense giant.

According to analysts' projections, the forecasts are as follows.

The dividend is expected to grow modestly over the medium term, with a payout ratio of just under 33%. This is a very safe rate. And while it is great to see the dividend return, this yield is nothing new.

In short, I wouldn't expect anyone to go out and buy Rolls-Royce shares for the dividends. However, even a percentage or two can contribute to our broader investment goals. It's certainly not something to be sniffed at.

What about the business as a whole?

As the earnings per share forecasts suggest, Rolls-Royce is a company that is experiencing significant earnings growth. Two years ago, this would have seemed almost impossible to some investors and analysts: the company really did seem to be in crisis.

Under new management, Rolls-Royce has become a much more agile and profitable company. And these changes have been complemented by favourable trends in civil aviation and defence, as demonstrated by recent results. In 2023, the group's return on equity more than doubled to 11.3%, while net debt was reduced to £2 billion from £3.3 billion at the end of 2022.

In civil aviation, Rolls-Royce reported that large engine flight hours (EFH) under long-term service agreements have returned to 100% of 2019 levels in the four months to 30 April 2024, driven by the continued recovery in international traffic in Asia and the growing Rolls-Royce fleet. The company has also secured new widebody aircraft contracts, including orders from VietJet, Starlux and IndiGo.

Meanwhile, Vladimir Putin's war in Ukraine has seen governments around the world commit to new military procurement programmes. As a major supplier of propulsion systems to the sector, the company has seen a surge in demand.

What's the problem?

Like any investment, there is always a risk. Some investors, and a small minority of analysts, are concerned that the stock is simply becoming too expensive. At 30 times forward earnings, it is not cheap compared to the FTSE 100 Index On average, about 13 times.

Investors are putting a lot of emphasis on the growth potential of stocks. If earnings growth starts to slow, stocks could plummet.

However, given the growth P/E ratio of 1.03 and the incredible competitive advantage, I remain bullish on Rolls-Royce, as do many analysts.