How to Read Dividend Growth Stocks: Growth Rate, Consecutive Raises and Trailing Yield

Look at the trend, not just the size

The first number most people notice in a dividend stock is the dividend yield. But yield is a snapshot of one moment. It does not tell you whether the dividend has grown every year, stayed flat, or been cut and then restored. A dividend growth stock is not so much one that pays a large dividend today as one that has raised its dividend steadily for a long time. So when looking at these stocks, read three numbers together rather than yield alone: the dividend growth rate, the number of consecutive years of increases, and the trailing 12-month yield. The basics, such as where dividends come from and what the ex-dividend date is, are covered in the guide on where dividend money comes from. This guide is the next step: reading how a dividend has developed over time.

Growth rate: annualized, not one year

The dividend growth rate shows how much the annual dividend total rose each year. A single year's change (this year's total ÷ last year's total − 1) swings with payment timing or one special dividend, so the 5-year and 10-year compound annual growth rates (CAGR) are usually read alongside it. The formula is (total for the latest complete year ÷ total N years earlier)^(1/N) − 1. For example, if the annual dividend was 1.00 per share ten years ago and 1.80 last year, the annualized growth rate is about 6.1%. At 7% a year a dividend roughly doubles in about ten years (1.07 to the 10th power ≈ 1.97), so a gap of a few percentage points becomes large over long periods. Note that the annualized figure uses only the first and last years, so a cut in between can be hidden. That is why you also look at the year-by-year bars.

• 1-year change: shows the latest move but is noisy
• 5-year annualized: summarizes recent dividend policy
• 10-year annualized: usually spans at least one downturn, useful for judging stability
• If the three differ widely, policy may have changed recently, so open the yearly record

Reading consecutive years of increases

Consecutive increases count, going back from the latest complete year, how many years in a row the annual dividend total exceeded the previous year. One decrease resets the count to zero. In the US, the 'Dividend Aristocrats' index of S&P 500 members that have raised dividends for at least 25 consecutive years is well known; such long runs draw attention because the company kept its dividend through several recessions. But the count is sensitive to method. The same stock can show a different number depending on whether you count annual totals or per-payment amounts, and if ex-dividend dates drift between late December and early January, one year may capture four payments and the next only three, making it look like a cut when there was none. A year with a special dividend jumps, so the following year can register as a decrease. If the count looks wrong, open the per-payment record and find out why.

Trailing 12-month yield versus forward yield

Dividend yield comes in two versions depending on which dividend goes in the numerator. The trailing 12-month yield divides the sum of dividends that went ex-dividend in the last 365 days by the current price. It uses money already paid, so it is certain, but if the dividend was raised in the meantime it understates what you would receive next. The forward yield multiplies the most recent payment by the number of payments per year and divides by the price. It reflects the latest raise but assumes the company keeps paying that amount. A large gap between the two suggests a recent raise, cut or change in payment frequency, so check the record. Both use the share price as the denominator, so if the price falls sharply the yield rises even when the dividend is unchanged. When a yield suddenly looks high, first separate whether the dividend rose or the price fell.

What feeds growth: earnings and payout ratio

Dividends ultimately come out of what the company earns. Dividend per share can be written as earnings per share × payout ratio (the share of earnings paid out), so for a dividend to keep rising either earnings must grow or the payout ratio must rise. If earnings are flat while the dividend climbs, the payout ratio is going up, and since it cannot stay above 100% for long, that kind of growth eventually stops. So when reading a dividend growth rate, it helps to look at earnings growth and the change in payout ratio over the same period. For businesses whose earnings swing with the economy, comparing dividends with operating cash flow is often more accurate than using accounting profit. Where to find these figures is covered in the guide on the order for reading the three financial statements.

Trading high yield for high growth

When comparing dividend stocks, they often split into those with a high current yield but little dividend growth, and those with a low current yield but fast past growth. Neither is better by rule. You will also see 'yield on cost', the dividend you receive now relative to the price you paid. For example, if you bought at a 2% yield and the dividend then grew 10% a year for ten years, your yield on cost would be about 5.2%. But that is a way of looking at it, not a return. Actual performance has to be judged by total return, price change plus dividends received, and compared with what the money would have done elsewhere. The difference between reinvesting dividends and looking at price alone is calculated with adjusted prices, explained in the guide on adjusted prices and stock splits.

Common traps

Dividend growth records look tidy, which makes them easy to over-trust. These are frequent misreadings. In particular, converting a foreign stock's dividends into your home currency can make the dividend appear to rise and fall with the exchange rate, so read dividend policy in the local currency and look at the currency effect separately.

• Assuming a long run of increases will continue
• Mistaking a yield that rose because the price crashed for dividend growth
• Using a year inflated by a special dividend as the start or end of a growth calculation
• Reading changes in converted-currency dividends as changes in company policy
• Treating increases kept up by raising the payout ratio while earnings fell as healthy growth
• Treating pre-tax yield as the amount you actually receive

Using the tools on this site

This site's Dividend History & Growth tool uses Yahoo Finance dividend records to show a per-payment table, annual dividend bars, year-over-year change, 5- and 10-year dividend growth rates (annualized), payment frequency, trailing 12-month dividends and yield, and years of consecutive increases, and compares up to three stocks side by side. The current year is excluded from growth rates because it is still in progress, and dates are the ex-dividend dates recorded by Yahoo. To work out dividends after tax, enter your share count and dividend per share in the Dividend Calculator. For Korean investors, dividends on Korean stocks have 15.4% withheld (including local income tax), and US stock dividends usually have 15% withheld in the US. Taxation can change with the size of your total financial income, so see the guide on taxes on stock investing as well.

Limits and disclaimer

A dividend record is a list of past decisions. A company can cut or suspend its dividend at any time if earnings or conditions change, and companies with decades of increases are no exception. Data providers' records can differ from company filings in dates or amounts, so check official company materials before important decisions. This guide explains how to calculate and read dividend growth figures. It is not a suggestion to buy or sell any stock and is not investment advice.