Dividends are distributions made by companies from profits or reserves, subject to board approval. Not every stock offers this benefit. It usually depends on the number of shares you own.
The dividend growth rate measures the annual rise in these payouts. It shows the percentage increase in dividends from one year to the next.
Suppose you invest in a company that raises its payment annually. The dividend growth rate tracks that specific increase. The dividend growth rate monitors the fluctuations in dividend payouts over a period of time.
Investors looking for long-term income use this metric often. It helps reveal the potential future earnings from your current holdings.
What is the dividend growth rate?
Imagine you own shares in a local manufacturing firm. In 2024, this company paid you a dividend of ₹10 per share. The business did well, so in 2025 they increased the payment to ₹12 per share.
The difference here is ₹2. This represents a 20% increase from the previous year. That 20% figure is the dividend growth rate. It tells you exactly how much your dividend income stream has grown in just one year.
How to Calculate the Dividend Growth Rate?
You can calculate the dividend growth rate to track your income progress. The simplest method compares the dividend paid in the current year against the previous year.
The Formula: The calculation is straightforward. You divide the recent dividend by the older dividend. Then, you subtract one from the result to find the growth factor.
For example, let's say a company paid a dividend last year of ₹1.20 per share and this year increased it to ₹1.70 per share.
Step 1: Division – divide the old amount into the new amount. To calculate, you will get 1.70 / 1.20 = 1.4167
Step 2: Subtraction – subtract one from the previous multiplication. To calculate, you will get 1.4167 - 1 = 0.4167
Step 3: Percentage —Multiply by 100 to get a percentage. To calculate, you will get 0.4167 * 100 = 41.67%
Result: Therefore, in this example, the dividend growth rate increased by 41.67%. This rate indicates the specific amount that has increased in dividend payout compared to the previous year.
Additional Read: Dividend Yield Calculator
Example of Dividend Growth Rate
Let’s take an example to understand the dividend growth rate better:
Imagine that a certain company has the following dividend payouts for succeeding years:
Year
| Dividend Per Share
|
2018
| ₹ 1.50
|
2019
| ₹ 1.65
|
2020
| ₹ 1.82
|
2021
| ₹ 2.00
|
Here, you can see that the company has increased its dividend payouts every year. Now, you can calculate the dividend growth rate of each year in the following way:
Dividend Growth Rate = (Dividend Growth Rate of current year/ Dividend Growth Rate of previous year -1) * 100.
For 2019, the dividend growth rate would be (1.65/1.50-1)* 100= 10%.
For 2020, the dividend growth rate would be (1.82/1.65-1) * 100= 10.3%
For 2021, the dividend growth rate would be (2.00/1.82-1)* 100= 9.89%.
Additionally Read - Dividend Yield Calculator
Benefits of Assessing Dividend Growth Rates
The Stability of Compounding: The growth of dividends may enhance income over time, subject to dividend policy and company performance. When a company increases payouts regularly, your yield on the original investment improves. This process helps increase wealth.
Hedge Against Inflation: You will deal with the costs of living better with increasing dividends. If your dividends are increasing faster than the rate of inflation, your purchasing power continues to be strong in your retirement years. May help offset inflation in some cases, depending on payout growth.
Sign of Business Health: May indicate stable cash flows, though it does not assure future performance. Management teams tend to only increase dividends when confident in their cash flow and profit availability, looking toward the future.
Valuation Improvement: This data assists in checking the fair price of a stock. Investors look for fair pricing based on future income.
Additional Read: Dividend Rate vs. Dividend Yield
Growth Rate of Dividends and Its Impact on Security Pricing
Know that the dividend growth rate and security pricing are not mutually exclusive. This means that as the rate of dividends increases annually it impacts the value and pricing of security of the said company as well.
Let’s take a quick look at the impact of dividend growth rate on security pricing:
The Gordon Growth Model Impact
The Gordon Growth Model shows an evident impact of the dividend growth rate on security pricing, here’s how:
P= D1/ r-g.
Here, P is the stock price, r is the required rate of return or the discount rate, D1 is the expected dividend in the next year and g is the dividend growth rate.
Now, to understand the impact, remember that if the dividend growth rate is increasing, the denominator decreases thus leading to a growth in the stock price and if the dividend growth rate decreases there is a decline in the stock price.
Impact on the Market Sentiments
In addition to the technical relation between the dividend growth rate and stock pricing, there are certain market sentiments that you must be aware of. For instance, when a company announces a decline in its dividend growth, this often leads to investors selling their shares, which eventually results in a fall in the stock price. Additionally, when the dividend growth rate is higher it represents a promising financial health of the company that attracts long-term investors.
