What is Dividend Growth Rate?
The dividend growth rate is the rate of growth of dividend over the previous year; if 2018’s dividend is $2 per share and 2019’s dividend is $3 per share, then there is a growth rate of 50% in the dividend.
Although it is usually calculated on an annual basis, it can also be calculated on a quarterly or monthly basis if required. It can be calculated (using the arithmetic mean) by adding the available historical growth rates and then dividing the result by the number of corresponding periods.
Dividend Growth Rate Formula
- Gi = Dividend growth in ith year,
- n = No. of periods
It can be calculated using the compounded growth rate method by using the initial dividend and final dividend and the number of periods in between the dividends.
- Dn = Final dividend
- D0 = Initial dividend
- n = No. of periods
The formula using the arithmetic mean can be calculated by using the following steps:
Step 1: Firstly, gather all the historical dividend growth of the company and add up all of them. It will be easily available from the annual report of the company. The periodic dividend growth can be calculated by dividing the current periodic dividend Di by the last periodic dividend Di-1 and subtract one from the result and then expressed in terms of percentage. It is denoted by Gi.
Gi = (Di / Di-1) – 1
Step 2: Next, determine the number of periods for which the historical growth rates have been collected, and it is denoted by n.
Step 3: Finally, the formula for dividend growth rate can be derived by dividing the sum of historical dividend growths by the no. of periods, as shown below.
Dividend Growth Rate = (G1 + G2 + …….. + Gn) / n
The formula using compounded method calculation can be done by using the following steps:
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Step 1: Firstly, determine the initial dividend from the annual report of the past and the final dividend from the recent annual report. The initial dividend and final dividend is denoted by D0 and Dn, respectively.
Step 2: Next, determine the number of periods between the initial dividend period and the recent dividend period, and it is denoted by n.
Step 3: Finally, dividend growth calculation can be derived by dividing the final dividend by the initial dividend and then raising the result to the power of reciprocal of the no. of periods and subtracting one from it, as shown below.
Dividend Growth Rate Formula = (Dn / D0)1/n – 1
Calculate Dividend Growth Rate
Let us take the example of Apple Inc.’s dividend history during the last five financial years starting from 2014.
- Final dividend, D2018 = $2.72
- Initial dividend, D2014 = $1.82
- No. of periods, n = 2018 – 2014 = 4 years
Determine the dividend growth based on the given information using the following methods.
- Arithmetic mean formula
- Compounded growth method
Below is data for calculation of Dividend Growth (using the arithmetic mean & compounded growth method) of Apple Inc.’s
As per question,
- Dividend growth in 2015, G2015 = [($1.98 / $1.82) – 1] * 100% = 8.79%
- Dividend growth in 2016, G2016 = [($2.18 / $1.98) – 1] * 100% = 10.10%
- Dividend growth in 2017, G2017 = [($2.40 / $2.18) – 1] * 100% = 10.09%
- Dividend growth in 2018, G2018 = [($2.72 / $2.40) – 1] * 100% = 13.33%
Now, no. of periods, n = 2018 – 2014
= 4 years
Therefore, the annualized dividend growth using arithmetic mean method can be calculated as,
Dividend Growth Rate = (G2015 + G2016 + G2017 + G2018) / n
= (8.79% + 10.10% + 10.09% + 13.33%) / 4
Dividend Growth = 10.58%
Therefore, the annualized dividend growth rate calculation using the compounded growth method will be
Dividend Growth Rate Formula = [(D2018 / D2014)1/n – 1] * 100%
= [($2.72 / $1.82)1/4 – 1] * 100%
Dividend Growth (Compounded Growth)= 10.57%
From the case of Apple Inc.’s dividend history, it can be seen that the dividend growth rate calculated by either of the two methods gives approximately the same results.
Relevance and Uses
From an investor’s perspective, it is important to understand this concept to assess earning from a stock investment. For instance, a strong dividend growth history could indicate likely future dividend growth, which is a sign of long-term profitability for the stock. Further, a financial user can use any interval for the dividend growth calculation. This concept is also essential because it is primarily used in the dividend discount model, which finds extensive application in the determination of security pricing.
You can download this Excel Template here – Dividend Growth Rate Formula Excel Template
This has been a guide to what is Dividend Growth Rate?. Here we discuss the formula to calculate Dividend Growth Rate using the arithmetic mean and compounded growth rate method along with examples and a downloadable excel sheet. You can learn more about accounting from the following articles –