Dividend Gr. 3/5Y
Dividend growth rate over 3/5 years
What is Dividend Gr. 3/5Y (Dividend Growth Rate 3-5 Years)?
Dividend Gr. 3/5Y (Dividend Growth Rate 3-5 Years) is a metric that shows how much a company has increased its dividend each year on average over the past 3 to 5 years. Instead of just looking at how big the dividend is right now, it measures how fast the dividend is growing. To put it in simple terms, it's like how an annual raise (dividend growth rate) can matter more than your current salary (dividend amount). If your raise rate is high, your salary grows much bigger over time.
Key Terms (Korean-English)
Dividend Growth Rate = Dividend Growth Rate
CAGR = Compound Annual Growth Rate
Dividend Aristocrat = Dividend Aristocrat (companies that have raised dividends for 25+ consecutive years)
Dividend King = Dividend King (companies that have raised dividends for 50+ consecutive years)
YOC = Yield on Cost
Dividend growth rate is a key metric in dividend investing. Even if the current dividend yield is low, a high dividend growth rate can help you achieve a very high YOC (Yield on Cost) over the long term. For example, even a company with a current dividend yield of 1% that raises its dividend by 15% every year will have a YOC of about 2% after 5 years and about 4% after 10 years. The power of compounding works for dividends too.
How to Calculate Dividend Growth Rate
Calculation Formula (CAGR Method)
Dividend Growth Rate (CAGR) = (Current Dividend / Dividend N Years Ago)^(1/N) - 1
Example: If the dividend 5 years ago was $1.00 and the current dividend is $1.60
Dividend Growth Rate = (1.60 / 1.00)^(1/5) - 1 = about 9.9% (annual average)
Example: If the dividend 3 years ago was $0.80 and the current dividend is $1.00
Dividend Growth Rate = (1.00 / 0.80)^(1/3) - 1 = about 7.7% (annual average)
Let's look at real companies' dividend growth rates. Microsoft (MSFT) has recorded an average annual dividend growth rate of about 10-11% over the past 5 years. Visa (V) has shown even faster dividend growth at about 15-17% per year. On the other hand, AT&T (T) significantly cut its dividend in 2022, making its dividend growth rate negative. As you can see, dividend growth rate is an important metric that shows both a company's financial health and its commitment to rewarding shareholders.
Coca-Cola (KO) is a Dividend King that has raised its dividend for over 60 consecutive years. Its recent 5-year dividend growth rate is only about 3-4%, which isn't high, but the consistency of never cutting the dividend for over half a century gives investors great confidence. On the other hand, Home Depot (HD) has been raising its dividend at about 10-12% per year over the past 5 years while maintaining a stable business, making it a dividend stock that combines both growth and stability.
How to Interpret Dividend Growth Rate
Excellent: 10% or more per year
If the dividend grows by 10% or more every year, the dividend doubles roughly every 7 years (Rule of 72). Companies like Visa (V), Mastercard (MA), and Apple (AAPL) fall into this category. However, these companies often have low current dividend yields (less than 1%), so this is an investment focused on long-term growth rather than immediate dividend income.
Good: 3-10% per year
Most Dividend Aristocrats fall into this range. Since this exceeds the inflation rate (2-3%), real dividend value is maintained or increased. Representative examples include Coca-Cola (KO), Procter & Gamble (PG), and Johnson & Johnson (JNJ). These are companies with a balanced combination of stability and growth.
Risky: 0% or below (frozen or cut)
If the dividend growth rate is 0%, the dividend has been frozen. If it's negative, the dividend has been cut. A dividend cut is a strong warning sign that the company's financial situation has deteriorated. Considering inflation, even a frozen dividend effectively means a reduction, so this is a bad sign for long-term investors.
Comparison with Similar Metrics
Dividend Growth Rate vs Dividend Yield
Dividend yield is a snapshot of the current moment, while dividend growth rate shows the direction and speed of change. A company with a low dividend yield but high growth rate can provide higher total returns in the long run compared to a company with a high dividend yield but 0% growth. This is called 'dividend growth investing.'
Dividend Growth Rate vs EPS Growth Rate
Ideally, dividend growth rate should be lower than EPS growth rate. If dividends grow faster than earnings, the payout ratio rises and may eventually reach an unsustainable level. A company whose EPS grows 5% per year but raises its dividend 15% per year is at risk of a dividend cut in the long run.
3-Year Dividend Growth Rate vs 5-Year Dividend Growth Rate
The 3-year growth rate reflects recent trends, while the 5-year growth rate reflects longer-term trends. If the 3-year growth rate is higher than the 5-year rate, dividend growth is accelerating. If it's lower, growth is slowing. Looking at the 10-year growth rate as well gives you an even more accurate picture of the long-term trend.
Practical Application Strategies
Strategy 1: Combining Dividend Growth and Dividend Yield
Companies with a current dividend yield of 2-4% and a dividend growth rate of 7% or more per year are called the 'sweet spot.' These companies provide a decent level of dividend income right now while growing their dividends rapidly over time. Companies like Broadcom (AVGO) and Texas Instruments (TXN) are known to fall into this category.
Strategy 2: Dividend Aristocrats/Kings Investing
This strategy invests in companies that have raised dividends for 25+ consecutive years (Dividend Aristocrats) or 50+ years (Dividend Kings). The dividend growth rates of these companies may not be flashy (3-5% per year), but the fact that they have never cut their dividend for decades proves the quality of the business. The NOBL ETF is an ETF that contains only Dividend Aristocrats.
Strategy 3: Simulating Future Dividends
You can simulate future dividends based on past dividend growth rates. For example, if the current dividend is $2 per share and the dividend growth rate is 8% per year, the expected dividend in 10 years would be 2 x (1.08)^10 = about $4.32. If you bought at a current price of $50, the YOC after 10 years would be 4.32 / 50 = 8.6%.
Strategy 4: Detecting Slowing Dividend Growth
If a company's dividend growth rate starts to slow down compared to before, it may indicate that the company's earnings growth has stalled or financial conditions are worsening. If a company that used to raise its dividend by 10% every year suddenly only raises it by 2%, you need to find out why the growth rate dropped sharply. This could be a precursor to a future dividend freeze or cut.
Dividend Growth Rate Characteristics by Industry
Tech Stocks
They have a short dividend history but very high dividend growth rates. Apple (AAPL) and Microsoft (MSFT) have shown dividend growth rates of 10% or more per year. This is because their businesses grow quickly and have excellent cash-generating capabilities.
Utilities / Consumer Staples
Dividend growth rates are low at 2-5% per year, but they have consistently raised them without missing a single time for decades. Stability and predictability are the key attractions. They are suitable for pension-like investments.
Financial Stocks
Bank stocks' dividend growth rates are heavily influenced by the economy and regulations. During the 2008 financial crisis, most banks cut their dividends, then raised them aggressively during the recovery period. JPMorgan (JPM) has made aggressive dividend hikes since 2013.
Energy
Dividend growth rates vary greatly depending on oil prices. There is a pattern of large increases during oil booms and cuts during downturns. ExxonMobil (XOM) has maintained its dividend for over 40 years, but small and mid-sized energy companies have greater dividend volatility.
Cautions
1. Past growth doesn't guarantee the future: Even a company that has raised its dividend by 15% per year for the past 5 years may see its growth rate slow down or have its dividend cut in the future due to changes in the industry environment or deteriorating performance. You must always check whether the earnings growth that funds dividend growth is sustainable.
2. Payout ratio upper limit: For a company whose payout ratio is already above 80% to maintain its dividend growth rate, its earnings must grow just as quickly. A high dividend growth rate from a company with no room in its payout ratio may not be sustainable.
3. Distortion from special dividends: If a special dividend is included in a particular year, the dividend growth rate may be overestimated or underestimated. It is more accurate to separate out regular dividends when calculating the growth rate.
4. Watch out for the base effect: When a company cuts its dividend and then restores it, the growth rate can come out abnormally high. You need to check whether it has fully recovered to pre-cut levels or whether it is still below.
Checklist: Items to Review When Analyzing Dividend Growth Rate
1. Check both the 3-year and 5-year dividend growth rates (CAGR) separately
2. Look at the year-over-year dividend changes to see if increases have been consistent
3. Compare with EPS growth rate to judge whether dividend growth is sustainable
4. Check whether the current payout ratio leaves room for future increases
5. Check how many consecutive years of dividend increases (Aristocrat/King status)
6. Compare dividend growth rate with competitors in the industry
7. Check whether one-time factors like special dividends have distorted the growth rate
Frequently Asked Questions (FAQ)
Q. Which is more important: dividend growth rate or dividend yield?
A. It depends on your investment goal. For investors who need immediate dividend income after retirement, the current dividend yield is more important. On the other hand, for young investors planning long-term investments of 20-30 years, dividend growth rate is more important. This is because companies with high dividend growth rates see their yield on cost increase significantly over time. The ideal is a company that has both a reasonable dividend yield (2-3%) and a high dividend growth rate (7% or more) at the same time.
Q. What are the requirements to become a Dividend Aristocrat?
A. You must be an S&P 500 constituent and have raised your dividend every year for at least 25 consecutive years. As of 2024, about 66 companies qualify as Dividend Aristocrats. If you have raised your dividend for 50+ consecutive years, you are called a Dividend King, and companies like Coca-Cola (KO), Procter & Gamble (PG), and 3M (MMM) belong here. The Dividend Aristocrats list is updated every year, and companies that cut their dividends are removed from the list.
Q. Is it a problem if dividend growth rate is lower than inflation?
A. If the dividend growth rate is lower than inflation (usually 2-3%), the real purchasing power of the dividend decreases. In other words, even if the face value of the dividend you receive is the same or slightly higher, you can actually buy fewer things with it. For long-term dividend investing, it is advisable to choose companies that show dividend growth rates that at least exceed inflation.
Q. What dividend growth stock ETFs are available?
A. A representative dividend growth ETF is VIG (Vanguard Dividend Appreciation ETF), which invests in companies that have raised their dividends for 10+ consecutive years. DGRO (iShares Core Dividend Growth ETF) invests in companies that have raised their dividends for 5+ consecutive years. NOBL (ProShares S&P 500 Dividend Aristocrats ETF) is an ETF that contains only Dividend Aristocrats. Through these ETFs, you can diversify the risk of individual stocks while executing a dividend growth strategy.
Reference Notes for Korean Investors
Differences from Korean dividend culture: The culture of raising dividends every year has not yet taken root among Korean companies. In contrast, in the United States, there are dozens of companies that have raised dividends for 25 or 50+ consecutive years. By investing in US dividend growth stocks, you can enjoy the benefits of steady dividend growth that are hard to experience in Korea.
Exchange rates and dividend growth: Even if your dividend grows in dollars, when converted to Korean won, it is affected by exchange rate fluctuations. However, if the Korean won tends to weaken (exchange rate rises) over the long term, you can enjoy a double effect where the won value of your dollar dividends also rises.
Tax effects: As your annual dividend income grows due to dividend growth, you may reach the threshold for comprehensive income tax filing (overseas dividend income exceeding 20 million KRW per year). When making long-term plans, you should also consider the tax changes resulting from dividend growth.
Using ISA/pension accounts: Some brokerages allow overseas stock investments through ISA (Individual Savings Account) or pension savings accounts. Using these tax-advantaged accounts can maximize the compounding effect of dividend growth without tax burden.