Is dividend growth rate (DGR) an important aspect?
Dividend stocks are enabling income-seeking investors such as retirees to generate income from their invested assets, without the need to sell stocks.
In the long-run dividend-paying stocks and dividend growers are showing strong performances. Companies that grew or initiated a dividend have experienced the highest returns relative to other (S&P 500) stocks since 1972, with significantly less volatility.
Look at the total return of stocks, dividends are an important component. Historically, dividends have contributed approximately one-third of the total return for the S&P 500. In some decades, dividend income even accounted for more than one-half of total return.
The dividend growth rate (DGR) is an important aspect when analyzing dividend stocks, not only to identify the best dividend growers but also to help dividend investor to keep up with inflation.
Dividend growth means that the company should generate robust free cash flow. Free cash flow is defined as a company’s operating cash flow minus capital expenditures. The strong free cash flow allows a companies’ management to pay a higher dividend growth rate. Since 1990, the average or mean annual dividend growth rate for the S&P 500 index has been 6.04% through June 30, 2019.
(See also the article on high dividend stocks)
What is Dividend Growth Rate?
Dividend Growth Rate is often defined as the growth rate (in term of percentage) of the dividend of a particular stock realized during a certain period of time, most common is an annual period.
There are two formula’s to calculate the dividend growth rate, using the arithmetic mean or using compounded growth rate method.
Moneyinvestexpert uses the compounded growth rate method. The compounded growth rate method is calculated by using the initial dividend and final dividend and the number of periods (N) in between the dividends.
Dividend Growth Rate Formula (using Compounded Growth) = (Dfinal / Dinitial)1/n – 1
What is a good dividend growth rate?
The average annual dividend growth rate for the S&P 500 index has been around 6% for the period 1990- mid-2019.
Source: multpl.com
For a dividend aristocrat, we use the following indication for their dividend growth rate (3 years period):
DGR between 5% and 9%: average growth rate
DGR between 10% and 12.5%: fast growth rate
DGR above 12.5%: very fast growth rate
The table below lists the top ten dividend aristocrats and their current dividend yield, DGR for 3,5 and 10 years.
