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Dividend growth: measuring the rise in income paid out

How to calculate the average annual growth of the dividend per share, where to find it in an annual report, usual thresholds, and the traps of special dividends and splits.

Published

Definition

Dividend growth measures the average year-on-year increase in the dividend per share over a given period. It shows whether the income paid to shareholders is rising faster than inflation, and it reflects management’s confidence in future results.

Formula

Average annual growth = (dividend per share of the last year / dividend per share of the first year) to the power of (1 / number of years) − 1

Where to find it in an annual report

The dividend per share proposed to the annual general meeting appears in the management report, in the section on the appropriation of earnings, and in the part of the report about the share. Successive annual reports, or the company’s investor relations page, give the history. Data sites such as Moning show it too.

Common thresholds

Growing dividend: 5% a year or more over 5 years for green, 2 to 5% for orange, red below. Dividend growth well above earnings growth cannot last: it pushes the payout ratio up every year.

In the preset strategies

Preset strategy Criterion met To monitor Criterion not met
Growing dividend Dividend growth (annual average over 5 years) ≥ 5% 2% to 5% < 2%

Pitfalls

  • A special dividend, paid only once, distorts the calculation: remove it from the history.
  • A stock split or a bonus share issue changes the dividend per share: use adjusted figures.
  • A rapid rise funded by a payout ratio climbing toward 100% often comes before a freeze or a cut.
  • Dividends paid in a foreign currency vary with the exchange rate, even when the company changes nothing.

Where it does not apply

  • Companies that pay no dividend or have only just started one: there is no history to measure.
  • Companies that return cash mainly through share buybacks: dividend growth reflects only part of what goes back to shareholders.

A worked example

A fictitious company, called Company H here, paid €1.00 per share five years ago and €1.28 for the last financial year. Its average annual growth is (1.28 / 1.00) to the power of (1 / 5) − 1, or 5% a year. It reaches green in the Growing dividend preset strategy.

What to read it with

Dividend growth is read together with the payout ratio. If earnings rise by 5% a year and the dividend by 5% too, the payout ratio stays stable. If the dividend rises by 10% while earnings stand still, the payout ratio climbs every year, and the increases will eventually stop.

Sources