Dividend Growth Rate: How to Calculate and Project Future Income

The difference between a good dividend stock and a great one often comes down to a single metric: how fast the dividend grows. While a 3% yield might seem modest today, consistent 10% annual dividend growth can transform that income stream into something remarkable within a decade.

Introduction

Understanding dividend growth rate is essential for building a portfolio that generates increasing income over time. This metric tells you how quickly a company raises its dividend payments, helping you project future income and evaluate whether a stock can keep pace with—or exceed—inflation.

In this comprehensive guide, you'll learn how to calculate dividend growth rates using the CAGR formula, analyze whether growth is sustainable, project future income streams, and compare companies to find the best dividend growth investments. Whether you're building a retirement income portfolio or simply seeking stocks that pay you more each year, mastering the dividend growth rate will help you identify companies that can reliably increase your income for decades.

What Is Dividend Growth Rate and Why It Matters

The dividend growth rate measures the annualized percentage increase in a company's dividend payments over a specific period. According to research by M. J. Gordon in "Dividends, Earnings, and Stock Prices," a company's ability to grow dividends stems primarily from retained earnings, with the relationship expressed as: if a corporation earns a return r on investment and retains a fraction b of its income, the dividend can be expected to grow at the rate br.

Why dividend growth rate matters for investors:

• Inflation protection: Growth rates above inflation (typically 2-3%) preserve your purchasing power
• Income acceleration: According to Lowell Miller in "The Single Best Investment," a stock yielding 4.5% with 10% annual dividend growth will yield 8% on your original investment in just seven years
• Signal of financial health: As Miller notes, "dividends don't lie"—unlike earnings, which can involve accounting flexibility, dividend increases require actual cash
• Total return potential: Campbell and Shiller's research in "Stock Prices, Earnings, and Expected Dividends" demonstrates that dividend-price ratios and dividend growth rates are key predictors of long-term stock returns

The power of dividend growth becomes apparent over extended periods. A stock initially yielding 4.5% with 10% annual dividend growth will produce an 11.67% yield on your original investment by year 10 (Source: Miller). This creates what Miller calls a "double dip"—you receive increasing income while the stock price typically rises to reflect the higher dividend payments.

How to Calculate Dividend Growth Rate Using CAGR

The most accurate method for calculating dividend growth rate uses the Compound Annual Growth Rate (CAGR) formula. This approach accounts for the compounding effect of dividend increases over multiple years, providing a smoothed annual growth figure.

The CAGR formula for dividends:

CAGR = [(Ending Dividend / Beginning Dividend)^(1/Number of Years)] - 1

Step-by-step calculation example:

Let's say a company paid $2.00 per share in dividends five years ago and pays $3.22 per share today:

1. Identify your beginning dividend: $2.00
2. Identify your ending dividend: $3.22
3. Determine the number of years: 5
4. Apply the formula: [(3.22 / 2.00)^(1/5)] - 1
5. Calculate: [1.61^0.20] - 1 = 1.10 - 1 = 0.10 or 10%

This company has achieved a 10% CAGR in dividend payments over five years.

Alternative calculation methods:

• Year-over-year growth: Calculate the percentage change from one year to the next, then average the results. However, this simple averaging doesn't account for compounding and can be misleading.

• Linear regression: For companies with inconsistent dividend growth patterns, plotting dividends on a trendline can reveal the underlying growth trajectory.

According to Campbell and Shiller's research, the relationship between returns, dividend-price ratios, and dividend growth can be approximated linearly, making CAGR a particularly useful metric for projecting long-term returns.

Practical Excel tutorial for dividend growth rate:

1. In column A, list the years (e.g., 2019-2024)
2. In column B, enter the annual dividend per share for each year
3. To calculate CAGR, use: =(B6/B1)^(1/5)-1 (where B6 is your ending dividend and B1 is your beginning dividend)
4. Format the result as a percentage to get your annual growth rate
5. To verify, create a projection: starting with B1, multiply by (1 + growth rate) repeatedly—you should arrive at approximately B6

Analyzing Sustainable Growth: Can the Company Maintain It?

Not all dividend growth is created equal. A high historical growth rate means nothing if the company can't sustain it. As Gordon's research notes, retained earnings provide the most important and predictable cause of dividend growth, suggesting that sustainable growth depends on a company's ability to profitably reinvest earnings.

Key factors for sustainable dividend growth:

Payout ratio analysis: The payout ratio (dividends paid / earnings) reveals how much room a company has to continue raising dividends. According to Miller, companies typically maintain a policy of paying out a certain percentage of earnings—for example, 30% of earnings as dividends. If a company pays 30% of $1.00 in earnings ($0.30 dividend), and earnings grow 10%, the dividend can sustainably grow 10% to $0.33 (30% of $1.10).

• Low payout ratios (30-50%): Substantial room for dividend growth
• Moderate payout ratios (50-70%): Growth likely tied closely to earnings growth
• High payout ratios (70%+): Limited flexibility; growth may slow

Cash flow generation: Miller emphasizes that "cash growth is a measure of success" and serves as a litmus test for dividend safety. Companies with growing cash and cash equivalents demonstrate they're taking in more than they spend—a fundamental requirement for sustained dividend increases.

Earnings growth trajectory: As Miller notes, "dividend growth is only as good as projected earnings growth." Look for companies with:

• Consistent historical earnings growth (5-year track record minimum)
• Reasonable forward earnings projections from multiple analysts
• Earnings growth that exceeds projected dividend growth (provides margin of safety)

Industry and competitive position: Gordon's research found that dividend coefficients varied significantly across industries, with chemicals showing different valuation patterns than foods, steels, or machine tools. This suggests industry dynamics matter. Miller advises seeking companies with:

• Established franchises or competitive moats
• Mature, predictable business models
• Proven ability to navigate industry cycles

Management's dividend policy: Research by Koch and Sun (cited by Miller) found that investors view dividend growth as verification of past earnings reports rather than merely a signal about future prospects. Companies with explicit dividend growth policies provide the most predictable income streams.

Projecting Future Income: Building Your Dividend Growth Model

Understanding how your dividend income will grow over time transforms dividend growth rate from an abstract concept into a concrete planning tool. According to Miller's analysis, projecting dividend income helps you estimate when you'll reach key milestones, such as achieving the historical stock market return (approximately 11% annually) from dividends alone.

Creating a dividend projection model:

Step 1: Establish your baseline Start with the current annual dividend per share and your number of shares. For example:

• Current dividend: $2.50 per share annually
• Shares owned: 100
• Current annual income: $250

Step 2: Apply historical growth rate Using your calculated CAGR (e.g., 8%), project forward:

• Year 1: $250 × 1.08 = $270
• Year 2: $270 × 1.08 = $291.60
• Year 3: $291.60 × 1.08 = $314.93
• And so on...

Step 3: Calculate yield on original investment Miller demonstrates this powerfully: "By year seven (halfway through the year) we see that return on original investment from dividends alone is about 9%." Using his example of a 4.5% starting yield with 10% growth:

As Miller notes, "By year 10 your income from dividends alone exceeds the historical total return expectation from stocks."

Accounting for dividend reinvestment: If you reinvest dividends to buy additional shares, your income growth accelerates beyond the dividend growth rate alone. This creates what Miller calls your "compounding machine"—each dividend payment buys more shares, which generate more dividends, creating a virtuous cycle.

Reality checks for projections: Campbell and Shiller's research demonstrates that dividend-price ratios help predict long-term returns, with their model explaining 26.6% of the variance in ten-year real returns. However, they also note substantial variability, suggesting projections should include:

• Conservative scenarios (growth rate minus 2-3 percentage points)
• Base case (historical growth rate)
• Optimistic scenarios (growth rate plus 2-3 percentage points)

Miller warns that "fast dividend growth is typically associated with fast growing stocks" that eventually mature and slow down. Therefore, projections extending beyond 10 years should assume some moderation in growth rates.

Comparing Companies: Which Dividend Grower Is Best?

Once you can calculate and project dividend growth rates, the next challenge is comparing different stocks to identify the best opportunities. Gordon's research across multiple industries demonstrates that dividend valuation varies significantly based on industry characteristics, requiring careful comparative analysis.

Framework for comparing dividend growers:

Starting yield vs. growth trade-off: Miller provides a practical comparison: a stock yielding 4% with 10% growth versus one yielding 1% with 20% growth. While the latter grows faster, the former reaches an 8% yield on original investment in seven years, while the high-growth stock needs over ten years to reach the same point. Miller's insight: "It's better to take a bird in the hand" because fast-growing companies often slow down as they mature.

Target benchmarks according to Miller:

• Minimum starting yield: 1.5x the market average (if market yields 1.7%, target 2.5%+)
• Preferred starting yield: 2x the market average (e.g., 3.4%+)
• Minimum dividend growth: 4% annually (beats inflation with margin of safety)
• Optimal dividend growth: 10% annually (doubles income every seven years)

Multi-factor comparison approach:

When evaluating Company A (3% yield, 12% growth) versus Company B (5% yield, 7% growth):

1. Project 10-year income:

   • Company A reaches 9.3% yield on cost
   • Company B reaches 9.8% yield on cost
   • Nearly equivalent outcomes despite different paths

2. Assess sustainability: Gordon's research suggests retained earnings drive growth. Check:

   • Company A: Lower payout ratio may support 12% growth
   • Company B: Higher yield suggests higher payout; verify coverage

3. Consider quality factors: Miller emphasizes management quality and franchise strength matter as much as numbers

4. Evaluate industry position: Gordon's findings show chemicals commanded different dividend coefficients than foods or steels, reflecting growth expectations and stability

Red flags in comparative analysis:

• Exceptionally high growth with high yield: Often unsustainable; one metric typically moderates
• Recent growth surge: Miller warns about companies rapidly raising dividends to reach target levels—growth may slow once achieved
• Industry-specific concerns: Cyclical industries may show artificially high growth coming out of downturns

The yield-growth optimization:

According to Miller's formula for identifying Single Best Investment stocks: High quality + High current yield + High growth of yield = High total returns. The best companies balance both metrics rather than maximizing just one. His guideline: "a 4% yield is a reasonable portfolio target for initial income, using stocks that also manifest clear ability to continue steady and moderate growth."

Campbell and Shiller's research supports this balanced approach, finding that dividend-price ratios combined with dividend growth rates predict multiperiod returns more effectively than either metric alone.

FAQ: Common Questions About Dividend Growth Rate

What is a good dividend growth rate? According to Lowell Miller, a minimum dividend growth rate should be around 4% to beat inflation with a margin of safety, though 10% annual growth is optimal as it doubles your income approximately every seven years. The "good" rate depends on starting yield—higher yields often come with lower growth, while lower yields may offer faster growth.

How do you calculate 5-year dividend growth rate? Use the CAGR formula: [(Ending Dividend / Beginning Dividend)^(1/5)] - 1. For example, if dividends grew from $2.00 to $3.22 over five years: [(3.22/2.00)^0.20] - 1 = 10% annual growth rate. This accounts for compounding and provides a smoothed annual figure.

Can dividend growth rates predict stock returns? Yes, research by Campbell and Shiller demonstrates that dividend-price ratios combined with dividend growth rates have "striking ability to predict returns," explaining 26.6% of variance in ten-year real returns. However, predictions become less accurate over shorter periods, making dividend growth most useful for long-term investors.

What's the relationship between earnings growth and dividend growth? According to M. J. Gordon's research, if a company retains a fraction b of its income and earns return r on investment, dividends grow at rate br. Practically, Miller notes that if a company pays 30% of earnings as dividends and earnings grow 10%, dividends can sustainably grow 10% as well (30% of higher earnings).

Should I prioritize high yield or high growth? Miller argues for balance: "High quality + High current yield + High growth of yield = High total returns." Starting yield matters because it determines how quickly you reach income milestones. A 4% yield with 10% growth reaches 8% yield on cost in seven years, while a 1% yield with even 20% growth takes over ten years—and high growth rarely sustains that long.

Conclusion: Putting Dividend Growth Rate to Work

The dividend growth rate transforms dividend investing from static income generation into a dynamic wealth-building strategy. By calculating CAGR accurately, analyzing sustainability through payout ratios and cash flow, projecting future income streams, and comparing companies systematically, you can identify stocks that will reliably increase your income for decades.

Remember Miller's powerful insight: with dividend growth stocks, you get a "double dip"—rising income that meets or beats inflation, plus increasing stock prices as the market revalues your shares based on higher dividend payments. Start by targeting quality companies with yields at least 1.5x the market average and dividend growth rates of 7-10% annually, verify sustainability through payout ratios below 70% and growing cash positions, then let time and compounding work in your favor.

The companies that can consistently grow dividends year after year are exactly the ones you want as long-term partners in your portfolio—they're converting business success into shareholder wealth automatically, requiring no trading or timing on your part.

Important Disclaimers

Financial Disclaimer

This article is for educational purposes only and does not constitute financial, investment, or tax advice. Dividend amounts, yields, payment dates, and company financial metrics change frequently and may differ from the figures shown. Always verify current data before making investment decisions. Consult with a qualified financial advisor regarding your specific situation. Past performance does not guarantee future results.

Data Freshness Statement

Information in this article is current as of December 2025. Market prices, dividend yields, and company metrics are subject to daily changes. For real-time dividend tracking, consider using tools that update automatically with current market data.