Dividend growth is an immensely important statistic for investors to focus on. And that’s because investors are frequently attracted to stocks that have high dividend yields.
But often what’s more important than the current size of the dividend is the pace at which it has been growing (or shrinking). You see, growing dividends are a sign of a healthy stock, one that is committed to its shareholders, and may also be an indication of more dividend raises to come.
While a shrinking dividend, or an over-sized one, can be interpreted as a warning sign of problems with the company; that perhaps the investor needs to dig a little deeper into the company’s financials to see what troubles there may be.
Dividend Growth Rate
Because, as with bonds, a big dividend could mean the stock’s share price has recently fallen, making the dividend yield bigger, without an increase in the actual dollar amount of the dividend. You see, the dividend growth rate is the average rate of growth a stock’s dividend has experienced for a specific period of time.
Of course, depending on who’s doing the analysis, there are countless time periods that can be used. But the time period used must deliver a statistic that can help determine the benefit of owning a stock.
A one hundred-year average dividend growth rate is not a very relevant statistic. However, a five-year average dividend growth rate might be spot on.
When it comes to dividend growth rate, a stock with a long history of dividend payments is admirable and does make the stock more appealing. But a more recent history of both dividend payments and increases is a better indicator of the stocks potential dividend payouts in the coming years.
And, of course, awareness is always critical to investing success. So do your homework and calculate a stock’s dividend growth rate before you make an investment.
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