Dividend Growth Rate: Meaning and Example

The dividend growth rate measures how quickly a company’s dividend per share increases over time.

Income investors watch it closely because rising dividends can support long-term total return and signal management’s confidence in future cash generation.

How It Works

Dividend growth rate can be measured over one period or averaged across several years.

A simple one-year version is:

(new dividend - old dividend) / old dividend

Analysts often look at multi-year compounded growth instead of a single year’s change because dividend policy can be lumpy.

Worked Example

Suppose a company raises its annual dividend from $2.00 per share to $2.20 per share.

The dividend growth rate is:

($2.20 - $2.00) / $2.00 = 10%

Scenario Question

An investor says, “A high recent dividend growth rate guarantees high future growth.”

Answer: No. One large increase may not be sustainable if earnings and cash flow do not keep pace.

Related Terms

• Dividend Payout Ratio: A payout ratio that is already high can limit future dividend growth.
• Dividend Coverage Ratio: Strong earnings coverage makes future dividend growth more credible.
• Forward Dividend Yield: Forward yield often reflects the dividend expected over the next year.
• Gross Dividend Yield: Yield and growth are related but different ways of evaluating dividend stocks.
• Retained Earnings: Retention policy influences the balance between reinvestment and dividend growth.

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