How to Calculate Annual Growth Rate of Dividends

Dividend Growth Rate Calculator

How to Calculate Annual Growth Rate of Dividends

Calculating the annual growth rate of dividends is a crucial task for dividend growth investors. This metric, often referred to as the Dividend Compound Annual Growth Rate (CAGR), helps investors understand how effectively a company has been increasing its shareholder payouts over time. A consistent and high dividend growth rate is often a sign of a company's financial health and management's commitment to returning value to shareholders.

The Dividend Growth Formula

To calculate the annualized growth rate of dividends, we use the CAGR formula. This formula smooths out the volatility of dividend increases over a period of time, providing a clear geometric progression ratio.

Formula:
CAGR = (Current Dividend / Initial Dividend)^{(1 / Number of Years)} – 1

• Current Dividend: The most recent annual dividend payout per share.
• Initial Dividend: The annual dividend payout per share at the start of the period.
• Number of Years: The timespan between the initial and current dividend.

Why is Dividend Growth Important?

While high dividend yield attracts many investors, dividend growth is the engine that protects purchasing power against inflation. If a company's dividend growth rate exceeds the inflation rate, the investor's real income increases over time without selling any shares.

• Inflation Hedge: Growing dividends offset rising costs of living.
• Compounding Effect: Reinvesting growing dividends accelerates the power of compound interest.
• Valuation Indicator: Rapidly growing dividends can indicate that a stock is undervalued relative to its future income potential.

Example Calculation

Let's assume you want to analyze a stock over a 5-year period.

• In 2018 (Initial), the company paid $2.00 per share.
• In 2023 (Current), the company paid $3.22 per share.
• The duration is 5 years.

Step 1: Divide the current dividend by the initial dividend ($3.22 / $2.00 = 1.61).

Step 2: Raise the result to the power of 1 divided by the years (1.61)^(1/5) or (1.61)^0.2 = 1.10.

Step 3: Subtract 1 from the result (1.10 – 1 = 0.10).

Step 4: Convert to percentage (0.10 * 100 = 10%).

The company has grown its dividend at an average annual rate of 10% over the last 5 years.

Interpreting the Result

Typically, dividend growth rates are categorized as follows:

• 0-3%: Slow growth, often seen in mature utilities or telecoms. Barely keeps up with inflation.
• 4-7%: Moderate growth, typical of stable blue-chip consumer staples.
• 8-12%: Strong growth, often found in successful industrial or financial companies.
• 12%+: Aggressive growth, usually seen in tech companies initiating dividends or companies undergoing rapid expansion.

Use the calculator above to quickly determine the historical performance of your dividend stocks and make informed portfolio decisions.