Assessing a Portfolios Risk

On this blog, and other dividend investing blogs, we talk a lot about the dividend growth rate of the various companies we track. As part of good dividend analysis determining what the dividend growth rate has been is important, primarily because we need to see if the growth rate is accelerating or slowing. I have some suggestions for you to help determine these growth rates – the first one more difficult than the second but depends on the data available for the stock you are examining.

However, before we get into finding the data here is a definition of the dividend growth rate from Investopedia:

The annualized percentage rate of growth that a particular stock’s dividend undergoes over a period of time. The time period included in the analysis can be of any interval desired, and is calculated by using the least squares method, or by simply taking a simple annualized figure over the time period.

Method #1: Manually Calculating the Dividend Growth Rate

The first method I am going to present to determine the dividend growth rate is manual. It requires some sleuthing to get the dividends paid per year for a company. The best place to find this date that I have found is on the company website for each company. If you get the most recent annual report, you should be able to find the dividends paid per year for at least the past 5-years. Each company presents this data differently (i.e. number of years) however most companies that have strong dividend growth records are proud to highlight their dividends and present as much data as possible.

Once this data has been obtained, I then head over to Investopedia to use their handy Compound Annual Growth Calculator (CAGR). This tool requires three data inputs: the ending value or the most recent dividends per year number, the beginning value or the earliest dividends per year number, and finally the number of periods you have the data for. For example, let’s say in 2004 Coca-Cola’s dividends per year was $0.88 and in 2007 it was $1.36. Using the calculator to input the data for the three year period, we get a dividend growth rate of 15.62%.

The benefit of doing the dividend growth rate calculations using this manual method is that you can run the numbers for various periods. For example, you can calculate the CAGR for 10-years, 5-years, and 2-years. With this data you will know if the dividend growth is accelerating or decelerating. This is a crucial piece of analytical data to fully understand the health of the company. Obviously, as investors we prefer to see that growth rate accelerating.

Method #2: Using Website to Obtain the Dividend Growth Rate

The second method is quicker but not as informative, because it does not given the investor the ability to obtain the dividend growth rate for various periods of time. This method involves simply visiting websites to obtain a static number for the dividend growth rate. One good website for this is Morningstar. In their stock analysis section, they have a page called ‘Dividend Interpreter’ that provides a 5-year dividend growth rate. Again, this is a quick and dirty way to get a number, but if you are weeding out stocks with the highest growth rates, then this is a good place to start.

I hope this helps you in your dividend analysis of the dividend stocks you are interested.


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18 Comments   |  

18 Comments

June 13, 2008, 8:50 am

Hi,
Reuters.com also provides the 5 year dividend growth rate under their “ratios” section. That is where I get information and comparisons between stocks and their respective industry averages.
Hope this helps.
-Tyler

June 13, 2008, 9:12 am

Cool – thanks Tyler. I have never seen that section of their site before.

TDG

June 13, 2008, 9:43 pm

thanks for that investopedia compounding calculator…great tool. Happy Father’s Day!

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Jim
August 20, 2008, 4:22 pm

If anyone is interested in the math behind calculating CAGR…Using the example above of Coca-Cola: “2004 Coca-Cola’s dividends per year was $0.88 and in 2007 it was $1.36″

1. 1.36/.88 = 1.54 (Dividends grew 154% over the 3 year span)
2. (1.54 ^.33)-1 = .15615 = 3 Year CAGR (.33 1/#years, in this case 1/3)

This is useful for calculating growth rates for returns, eps, revenue, etc.

The Investopedia definition mentions using the least squares method, which is more complicated.

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