Dividend Growth Is Important
In addition to the dividend yield, the dividend growth rate is an important attribute of any dividend stock. Let's imagine two companies, Company A and Company B. The share price of each company's stock is $30. Company A pays a dividend yielding 5%, or $1.50 annually, and the dividend is expected to grow at 3% a year. Company B pays a dividend yielding only 3%, or $0.90, but it's dividend is expected to grow at 9% a year. Which company offers the better dividend. Let's take a look.
| Company A | Company B | ||
|---|---|---|---|
| Year | Dividend | Year | Dividend |
| 1 | $1.50 | 1 | $0.90 |
| 2 | $1.545 | 2 | $0.981 |
| 3 | $1.591 | 3 | $1.069 |
| 4 | $1.639 | 4 | $1.166 |
| 5 | $1.688 | 5 | $1.270 |
| 6 | $1.739 | 6 | $1.385 |
| 7 | $1.791 | 7 | $1.509 |
| 8 | $1.845 | 8 | $1.645 |
| 9 | $1.90 | 9 | $1.793 |
| 10 | $1.957 | 10 | $1.955 |
| 11 | $2.016 | 11 | $2.131 |
| 12 | $2.076 | 12 | $2.322 |
| 13 | $2.139 | 13 | $2.531 |
| 14 | $2.203 | 14 | $2.759 |
| 15 | $2.269 | 15 | $3.008 |
| 15 | $2.269 | 15 | $3.008 |
| 16 | $2.337 | 16 | $3.278 |
| 17 | $2.407 | 17 | $3.573 |
| 18 | $2.476 | 18 | $3.895 |
| 19 | $2.554 | 19 | $4.245 |
| 20 | $2.630 | 20 | $4.627 |
Initially Company A's dividend is greater than that of Company B. After 11 years Company B's dividend has caught up and surpassed that of Company A. After 20 years Company A has paid a total of $40.306 in dividends while Company B has paid a total of $46.044, a 14.24% difference. What is most striking is what happens after longer periods of time. After thirty years Company B has paid 71.91% more than Company A, and after 40 years that number jumps to 168.87%. So while yield is an important factor to consider, dividend growth is equally important, especially if you expect to hold the company for a long period of time.
