Dividend Growth Rate
The dividend growth rate measures how fast a company raises its dividend per share, expressed as an annualized percentage over a chosen window, commonly three, five, or ten years. For income-focused stock pickers it matters more than the starting yield, because it determines what a position pays years from now.
The math
A hypothetical company paid $1.60 per share five years ago and pays $2.60 today. The annualized growth rate is (2.60 / 1.60) ^ (1/5) - 1, or about 10.2 percent.
Hold that pace and the payout doubles roughly every seven years, without buying a single additional share.
| Year | Income on 1,000 shares |
|---|---|
| Today | $2,600 |
| Year 7 | about $5,300 |
| Year 14 | about $10,600 |
Compare that with a stock yielding twice as much today but growing its dividend at 2 percent: the faster grower overtakes it in annual income within a decade and never looks back.
The trap
Extrapolation is where the money leaks out. A 15 percent five-year growth rate often comes from a payout ratio climbing from 20 percent to 45 percent: the company was not growing that fast, it was distributing a larger slice.
Once the ratio plateaus, dividend growth falls to earnings growth, and investors who paid a premium multiple for the old trajectory absorb the derating. A screen sorted by trailing growth rate reliably ranks these late-stage accelerators at the top.
The move
Decompose the number before trusting it. Compare dividend growth with earnings per share growth over the same window: when the dividend grew faster, find out how much payout ratio expansion is left, because that fuel runs out.
Check the last two raises individually; a deceleration from 12 percent to 5 percent tells you more than any five-year average. The durable pattern to hunt is dividend growth roughly matching earnings growth on a stable ratio, funded by free cash flow.