Dividend growth rate is the annual increase in the scale of dividend payments to stockholders. Good dividend growth is a sign of a company with solid earnings.
Dividend growth rate is also referred to as dividend appreciation, and it can be computed fairly easily using historical data. Simply put, the dividend rate is the amount of dividend paid in a year divided by the share price when the dividend is paid.
If this rate is higher than the prior year, the dividend is said to have appreciated. Looking forward using the present value of future dividends can be done with valuation estimations such as the Dividend Discount Model (DDM) and the Gordon Growth Model (GGM). You can also determine the Sustainable Growth Rate (SGR), which is dividend growth that wouldn’t strain a company.
Companies that can show consistent dividend growth earn titles like Dividend Aristocrats. Dividend appreciation funds seek out companies with consistent dividend growth.
Sometimes it can appear that a company is over-emphasizing dividends when they constantly increase their payout, when perhaps they should retain more earnings, but statistically these companies maintain well.
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