How does dividend growth work?
Dividend growth is an important metric for dividend investors. It shows how a company’s dividend payout has grown over time. Companies that consistently increase their dividends can be attractive to long-term investors looking for increasing passive income.
How do we calculate dividend growth?
A common method for measuring dividend growth is the Compound Annual Growth Rate (CAGR). This method indicates the average growth rate over a period of time.
Dividend growth = (End Value / Beginning Value) ^ (1 / Number of years) - 1
If you want to know more about CAGR, read our article: What does CAGR mean?
As an example, we use the annual dividends of Coca-Cola:
- 2024: $ 1.94
- 2023: $ 1.84
- 2022: $ 1.76
- 2021: $ 1.68
Based on these amounts, we can calculate the annual dividend growth:
- 2024 vs 2023: (1.94 - 1.84) / 1.84 × 100 = 5.43%
- 2023 vs 2022: (1.84 - 1.76) / 1.76 × 100 = 4.55%
- 2022 vs 2021: (1.76 - 1.68) / 1.68 × 100 = 4.76%
Within PDT, we give the compounding annual dividend growth rate (CAGR). This growth will therefore differ from regular growth, because we are looking at the compound growth rate over a given period:
- 1-year CAGR: (1.94 / 1.84) - 1 = 5.43%
- 2-year CAGR: (1.94 / 1.76) ^ (1 / 2) - 1 = 4.99%
- 3-year CAGR: (1.94 / 1.68) ^ (1 / 3) - 1 = 4.91%