Dividend Growth Rate Definition and Examples

Many retired folks, investors looking to fight inflation, or looking for income from their stocks love their dividends. A big part of dividend investing is a stock’s dividend growth rate. A stock’s dividend growth rate shows how fast a company has increased its dividend in the past.

Stocks that increase their dividend over a long period are so popular with dividend investors that they even have a name. Investors call these stocks Dividend Aristocrats. For a stock to make the list of Dividend Aristocrats, it must increase its dividend every year for 25 years.

Being a Dividend Aristocrat doesn’t necessarily mean a dividend stock is right for you. For instance, a Dividend Aristocrat must only raise its dividend by a small amount each year to make the list. Therefore, the stock’s dividend growth might not meet your needs as an investor, especially when inflation is high.

In addition, the Dividend Aristocrat criterion has nothing to do with dividend yield. In other words, even though a stock’s dividend may be growing, it’s a small percentage of the price you must pay for the stock.

If you’re looking for stocks that grow their dividend, it will take a little math. Here’s how you can do it.

Definition of the dividend growth rate.

How to Calculate Dividend Growth Rate

The first thing you’ll need to do is grab your calculator. Don’t worry; you don’t need a fancy scientific calculator. Calculating dividend growth rates only requires a little arithmetic. So, any calculator will do.

Next, you’ll need to know how much the stock has paid in dividends last year and the year before last. The first place to check is the company’s website. You can find last year’s dividend in a few different places. Most stock companies have a special Investor Relations page dedicated to stock information. Other places you can see last year’s dividends are on investment websites. For example, you can find the dividend for The Coca-Cola Company (NYSE: KO) here.

If you want to go back further than one year, you can calculate the average of each of the past several year’s dividend growth rates. For this, you can still use any old calculator.

Dividend Growth Rate Formulas

Here is where you’ll use the dividend information that you’ve gathered. There are two different formulas that you can use to find the dividend growth rate over two years. The two formulas will give you the same dividend growth rate. So, you can use the one with which you’re most comfortable.

In the first formula, you take the dividend from this year and subtract it from the year before. That will tell you how much the dividend grew in dollars and cents. Then, divide by the dividend from the year before. That will give you a percentage that shows you the dividend growth rate.

(D2 – D1) / D1 = Dividend Growth Rate

To break it down even further…

On the other hand, you can divide last year’s dividend by the dividend from the year before and subtract one.

D2 / D1 – 1 = Dividend Growth Rate

Where:

For multiple years, find the dividend growth rate for each year you’re calculating. After doing that, add them all up and divide by the number of years that you figured. The calculations are similar if you want to find the average dividend growth rate for more than one year.

(DGR1 + DGR2 + DGR3 + DGR4 …) / N

Let’s break this down…

Examples

Let’s add some hypothetical numbers to the previous formulas to add some color. Say the stock you’re looking at paid a dividend per share of $2.12 the year before this last. Last year the dividend per share was $2.30. If we put those numbers into the first formula, it would look like this:

($2.30 – $2.12) / $2.12 = 8.49%

The dividend growth rate for the stock was 8.49% over the last year. Now let’s try the second formula:

($2.30 / $2.12) – 1 = 8.49%

You can use these two formulas to double-check your calculations. They should give you the same dividend growth rate every time.

Now let’s look at the formula for finding the average dividend growth rate for multiple years. Say the stock you’re looking at has paid the following dividends over the last four years:

D1 = $1.90

D2 = $2

D3 = $2.12

D4 = $2.30

You can use either of the one-year calculations to find the rate for each of the three previous years.

Finally:

(5.26% + 6% + 8.49%) / 3 = 6.58%

The second formula should get the same results. Let’s take a look.

And finally… (5.26% + 6% + 8.49%) / 3 = 6.58%

Tagged