Dividend Growth

The percentage rate at which a company or fund increases its dividend payments to shareholders over a specified period.

Dividend growth is the percentage rate at which a company or investment fund increases its distribution payments to shareholders over a specific timeframe, such as 1, 3, 5, or 10 years. It is calculated by comparing historical dividend payments to current ones, often expressed as a compound annual growth rate (CAGR). Consistent dividend growth indicates that a company is generating expanding cash flows and possesses a sustainable business model capable of progressively rewarding its investors. For income-focused investors, dividend growth is often a more critical metric than a high starting dividend yield. A stock with a modest initial yield but strong dividend growth can eventually generate a higher yield on cost than a stagnant high-yield stock. Furthermore, rising dividends serve as an organic hedge against inflation, preserving the purchasing power of the investor's income stream over time. When evaluating dividend growth, investors must monitor the payout ratio to ensure the increases are sustainable. If a company's dividend growth outpaces its earnings growth, the payout ratio will rise to unsustainable levels, increasing the risk of a dividend cut. Healthy dividend growth is typically backed by corresponding growth in net income and free cash flow.

Company A paid an annual dividend of $1.50 per share five years ago. Today, it pays an annual dividend of $2.20 per share. To find the 5-year compound annual dividend growth rate: ($2.20 / $1.50) ^ (1 / 5) - 1 = (1.4667) ^ 0.20 - 1 = 1.0796 - 1 = 7.96% per year.