In short: The dividend growth rate is the annual percentage change in a company's dividend per share. A company that raised its annual dividend from $2.00 to $2.10 grew it by 5% that year.
The formula
One-year growth
Growth (%) = (This year's dividend ÷ Last year's dividend − 1) × 100
Compound annual growth rate (CAGR)
CAGR = (Ending dividend ÷ Starting dividend)^(1 ÷ Years) − 1
Projected dividend
Dividend in year n = Current dividend × (1 + Growth rate)^n
Why growth matters as much as yield
Yield tells you what an investment pays today. Growth tells you how that payment might change. Over a few years the difference is small, but over decades a faster-growing dividend can overtake a higher starting yield.
Growth is not guaranteed. Dividends can be frozen, cut, or eliminated, especially during recessions or when a company's earnings fall. Historical growth describes the past only.
Choosing a growth rate to enter
- Look at the dividend history on the company's investor relations page and calculate the CAGR over 5 and 10 years. Short periods can be distorted by one large raise.
- Compare growth with earnings growth. Dividends that grow much faster than earnings push the payout ratio up, which cannot continue forever.
- Test a range. Run the calculator at a conservative rate, a middle rate, and 0% to see how sensitive your result is.
- Enter a negative growth rate to model a gradual dividend decline.
The rule of 72
A quick way to sense growth rates: divide 72 by the growth rate to estimate how many years it takes for the dividend to double. At 6% a year, a dividend doubles in roughly 72 ÷ 6 = 12 years. At 3%, it takes about 24 years. This is an approximation, not an exact result.
How the calculator applies growth
The Dividend Calculator holds the dividend per share constant within each year and raises it by your growth rate at the start of the next year. That mirrors how many companies announce one raise per year. Share price growth is entered separately, so you can model a dividend that grows faster or slower than the share price.
Worked examples
Hypothetical example: measuring historical growth
- A company paid $2.00 per share eight years ago and pays $2.95 today.
- CAGR = ($2.95 ÷ $2.00)^(1 ÷ 8) − 1 = 1.475^0.125 − 1.
- 1.475^0.125 ≈ 1.0498, so the CAGR is about 5.0% a year.
Result: Average dividend growth: about 5.0% a year over eight years.
Hypothetical example: high yield vs. high growth
- Option A: $10,000 at a 5% yield growing 1% a year. Year 1 income is $500.
- Option B: $10,000 at a 2.5% yield growing 8% a year. Year 1 income is $250.
- In year 11, A pays about $552 and B about $540. In year 12, A pays about $558 and B about $583.
- This ignores share price changes, reinvestment, and taxes, and assumes both growth rates hold, which is unlikely in practice.
Result: Option B's annual income overtakes Option A's in year 12 in this simplified example.
Examples are hypothetical and use round numbers for illustration. They do not describe any real security.
Common misconceptions
- “A long record of raises means the dividend is safe.” A history of increases shows past behavior. Companies with long records have still cut dividends when business conditions changed.
- “I should use the company's best recent growth rate.” Recent high growth often slows. Using a conservative rate, or several rates, gives a more realistic range.
Run your own numbers with these assumptions.
Use the Dividend CalculatorFrequently asked questions
What is a realistic dividend growth rate?
It varies widely by company and period, and it can be negative. Base your estimate on the specific company's long-term history and earnings growth, and test lower rates to see how much the result depends on that assumption.
Should dividend growth and share price growth be the same?
Not necessarily. Over long periods they are often related because both depend on earnings, but they can diverge for years. The calculator keeps them separate so you can test different combinations.
Sources
Next step
Continue with payout ratio, or plug what you've learned into the dividend calculator and compare a few scenarios.