Dividend Growth Rate: A Comprehensive Guide

Dividend Growth Rate: A Comprehensive Guide to Calculating Dividend Growth

Dividend growth is one of the key metrics that dividend investors use to measure a company's attractiveness. In this guide, we will discuss the dividend growth rate in-depth and teach you how to calculate it yourself. We will also provide examples of dividend growth rates for some well-known companies. By learning how to calculate dividend growth, you can make better investment decisions and ensure that you are getting good returns on your portfolio!

What is Dividend Growth Rate, and why is it important for investors?

Dividend growth rate is the percentage change in dividend payments from one year to the next. This rate indicates how quickly a dividend-paying company's dividend payments are growing and the strength and sustainability of its dividend income.

As dividend investors, it is essential to look for companies with solid dividend growth rates. This indicates that dividend payments are likely to remain high, and dividend income will continue to increase over time.

Remembering that strong fundamentals should support a strong dividend growth rate is crucial. This requires solid earnings and cash flow, along with a dependable history of dividend payments. We will cover more on this topic below.

Different methods of calculating the dividend growth rate

The dividend growth rate can be calculated in various ways, and each method provides different insights into the dividend payment history of a company.

Year-over-Year (YOY) Method

The year-over-year dividend growth rate is the percentage change in dividend payments from one year to the next. This method provides a quick and easy way to compare dividend growth over multiple years, although it can be skewed by large dividend payments or cuts in prior periods.

To calculate it using this method, simply subtract the dividend payment from one year ago (Div1) from the dividend payment for this year (Div2), and divide that number by the dividend from one year ago:

Dividend Growth Rate = ( Div2 – Div1 ) / Div1.

For example, using in 2022 Pepsi dividend payment of $4.53 and 2021 dividend payment of $4.25

Dividend Growth Rate = (4.53 – 4.25) /4.25 = 0.06588235294 or 6.58%.

To help with this calculation, you can use Wisesheets to get the dividend data right on your Excel or Googe Sheets spreadsheet and set up a template like this:

Year-over-Year (YOY) dividend growth

As you can see, this provides you with dividend growth rates over any years you'd like making your dividend growth analysis much faster. Better yet, you can get other fundamentals to assess the sustainability of dividend payment growth. More on that is below.

Compound Annual Growth Rate (CAGR) Method

The compound annual growth rate (CAGR) dividend growth rate is the average annual dividend growth rate over a specified period of time. This method takes into account dividend payment history over multiple years and averages out any major fluctuations in dividend payments, providing a more accurate representation of dividend growth than the YOY method.

To calculate the CAGR growth rate, you need to use the CAGR formula:

CAGR = ( Ending Value / Beginning Value ) ^ (1/Number of Years) – 1

For example, Pepsi's dividend payment for 2022 was $4.53, and its dividend payment in 2018 was $3.59

CAGR = ( 4.53 / 3.59 ) ^ (1/4) – 1 = 0.05986594616 or 5.98%

You can use Wisesheets to assist you with this calculation. Here's an example of how to calculate dividend growth rate using Wisesheets:

CAGR dividend growth

Fundamental Analysis and Dividend Growth Rate

It is important to remember that dividend payments need to be supported by strong fundamentals. This means that dividend payments must be backed up by solid earnings, cash flow, and a reliable dividend payment history. Therefore, investors should not just look at dividend growth rate when evaluating a dividend-paying company – they should also consider other factors such as the dividend payout ratio, earnings per share (EPS) growth, and dividend coverage ratio.

By combining dividend analysis with fundamental analysis, investors can better understand the strength and sustainability of dividend payments from any particular company. This allows them to make more informed dividend investing decisions.

dividend growth rate analysis

In practice, you can set up a template using Wisesheets data to analyze the dividend growth rate of a stock over time and compare it with the dividend payout ratio, dividend coverage ratio, and EPS growth. This will enable you to make informed decisions regarding the stock's dividend performance.

In order to have a sustainable dividend payment, you should look for companies where the dividend growth is justified by similar growth in the company's eps and free cash flow. This is because dividend payments come from a company's profits and cash flow.

Setting up a dividend growth analysis in this manner will save you time, allowing you to allocate more time to researching dividend-paying stocks.

How to track your dividend growth rate over time

It is essential to track the dividend growth rate for any dividend-paying stocks you own. This allows you to analyze the dividend payment history of a company and make more informed investing decisions. You can easily track it over time by setting up an Excel or Google Sheet spreadsheet with dividend data from Wisesheets.

In addition, you can use Wisesheets to provide you with real-time dividend data and allow you to track dividend growth rates and yields from any stock at the click of a button.

By tracking your dividend growth rate over time, you can easily compare dividend payments from one year to the next and assess dividend sustainability. This will help you make better dividend investing decisions and ensure your dividend income grows steadily.

Common mistakes investors make when calculating dividend growth rate

The most common mistake investors make when calculating the dividend growth rate is not considering the dividend payout ratio and dividend coverage ratios. Yet, these two metrics provide essential information about dividend sustainability and should always be considered when evaluating dividend-paying stocks. Ideally, you should look for companies with dividend payout ratios and dividend coverage ratios within a healthy range.

In addition, some investors may forget to calculate the compound annual growth rate (CAGR) of dividend payments. The CAGR dividend growth rate provides a more accurate representation of dividend payment history and should be used when assessing dividend-paying stocks.

Finally, investors should remember to track dividend growth rates over time to ensure that dividend payments are increasing steadily.

Conclusion

Dividend growth rate is an important metric for dividend investors. By understanding dividend payments and dividend sustainability, you can make more informed dividend investing decisions and ensure that your dividend income is growing at a steady pace. In addition, you can use Wisesheets to easily track dividend growth rates and yields from any dividend-paying stocks. Finally, when evaluating dividend-paying stocks, it is important to consider both the dividend payout ratio and dividend coverage ratios.Following these guidelines will help you make more informed dividend investing decisions.

To your investing success!

Guillermo Valles

Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts