Glossary · Dividends
Dividend Growth Rate: Measuring How Fast a Payout Rises
The dividend growth rate is the yearly pace at which a payout per share has risen. Compute it as a compound rate, and pick the years with care.
Definition
Dividend growth rate The annualized rate at which a company's dividend per share has grown over a stated period, calculated as a compound rate from the starting and ending annual dividends.
Also called Dividend CAGR, Annualized dividend growth, DGR.
Divide 61% by five and you get 12.2% a year. It’s a tidy number, and it overstates the growth. A dividend that rose from $1.00 to $1.61 over five years grew at about 10% a year, because each year’s raise is applied to the larger payout left by the raise before it, and dividing the total by five treats every one of those raises as if it had been applied to the original $1.00.
The formula
Dividend growth rate = (ending annual dividend / starting annual dividend)^(1 / years) - 1
Use annual dividends per share at both ends, and count the years between them, which is the number of steps and one less than the number of annual figures you’re looking at.
Most spreadsheets do the power step with a caret, or with a POWER function. A calculator’s y^x key works too.
Pick the window carefully
The formula uses two numbers. Anything unusual at either end moves the result, and everything in between is ignored.
A special dividend in the starting year is the classic trap. Suppose that hypothetical company also paid a one-off $0.30 in the first year, and you count it.
The regular payout grew just as fast as before. Only the starting figure changed. A special in the final year does the opposite and inflates the rate, which is why you take specials out before you measure, a point taken further in a special dividend says little about next year.
A cut does similar damage. A company that cut its dividend in year two and then raised it steadily can show a respectable five-year rate that hides the cut entirely, or a poor one that hides the recovery, depending on where the window starts. Look at every year in between. Running the rate over several windows, three years, five years and ten, shows whether the pace is steady or fading.
Compare it with earnings growth
A dividend can’t outgrow earnings forever. If the payout rises faster than profit per share for long enough, the payout ratio climbs, and eventually the company has to slow the increases, borrow, or cut.
At 63%, nothing is broken. The trend is the warning. Keep that gap going and the ratio keeps rising toward the point where the dividend eats most of the profit.
Where you see it
Quote pages and dividend screeners often show a growth figure, sometimes labeled with a period like 5Y. Check how it’s calculated. Some use a compound rate, some an average of yearly changes, and some include special dividends. The annual dividend history on the same page lets you compute it yourself in a minute. Take the regular dividends for the most recent full year and for the year you want to start from, leave out anything marked special or extra, and run the formula.
Using it
The growth rate is what makes a lower-yielding stock worth comparing with a higher-yielding one: a smaller payout growing quickly can pass a larger one growing slowly, as worked through in a growing dividend can overtake a higher yield. The dividend income calculator projects income forward if you give it a growth assumption. Use a rate you’d defend, below the historical one if in doubt. The dividends desk has the related pages on yield and payout.
What people get wrong
Averaging the yearly changes, or dividing total growth by the years. Both overstate the compound rate.
Another is taking the rate from a quote page without checking the window or whether specials are in it. The third is projecting a decade of past growth forward as though it were a promise.
Readers also ask
What is a good dividend growth rate?
No single benchmark fits every company. A useful rate is one the business can keep paying: growth roughly in line with earnings per share can last, while growth well above it pushes the payout ratio up and eventually has to slow. Look at the rate across several windows and at the payout ratio together.
How do you calculate dividend growth rate in a spreadsheet?
Divide the ending annual dividend by the starting one, raise the result to the power of one over the number of years, and subtract one. In most spreadsheets that's =(end/start)^(1/years)-1. A dividend going from $1.00 to $1.61 over five years works out to about 0.10, or 10% a year.
Does a high dividend growth rate mean the dividend will keep rising?
No. A growth rate describes what the board chose to do in the past. Future increases depend on earnings, cash flow, debt and the priorities of the board, and a dividend can be frozen or cut at any time. Read a long record as evidence about policy, and check that earnings still support it.