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What Is a Dividend Rate?
The dividend rate is the total expected dividend payments from an investment, fund, or portfolio expressed on an annualized basis, plus any additional non-recurring dividends that an investor may receive during that period.
The dividend rate is closely related to dividend yield and is sometimes used interchangeably, though yield reflects the rate as a percentage of the stock’s price. Dividend rates are important for investors to assess the stability and growth potential of dividend income, which can be influenced by factors such as a company’s maturity, sector, or changes in stock price.
Key Takeaways
- The dividend rate represents total expected annual dividend payments, including any additional non-recurring dividends.
- A high dividend rate can indicate a declining stock price, while lower rates suggest rising stock prices.
- Mature companies typically offer higher dividend yields compared to rapidly growing new companies.
- The dividend payout ratio shows a company’s dividend strength by comparing dividend payments to net income.
- Dividend aristocrats are companies with at least 25 years of steadily increasing dividend payments.
How Dividend Rates Impact Your Investments
The dividend rate is an estimate of the dividend-only return of an investment such as on a stock or mutual fund. If the dividend amount stays the same, the rate increases when the stock price goes down. And conversely, it will fall when the price of the stock rises. Since dividend rates depend on stock prices, they can seem unusually high when stock prices drop quickly.
Small, rapidly growing companies may pay lower dividends than mature companies in the same sector. In general, mature companies that aren’t growing very quickly pay the highest dividend yields. Sectors like consumer non-cyclicals and utilities, which market staple items, often pay the highest average yields.
Calculating Dividend Rates: A Step-by-Step Guide
To calculate the dividend rate of an investment, multiply the latest dividend payment by the number of periods in a year.
For example, if a fund of investments pays a dividend of 50 cents quarterly and also pays an extra dividend of 12 cents per share because of a nonrecurring event from which the company benefited, the dividend rate is $2.12 per year (50 cents x 4 quarters + 12 cents = $2.12).
Companies with large cash flows usually pay dividends. Conversely, rapidly growing businesses often reinvest cash instead of paying shareholder dividends. Cash-intensive companies producing essential goods like food, beverages, and healthcare often spend less on growth. Thus, these businesses are more likely to pay dividends to shareholders.
Evaluating Dividend Health With the Payout Ratio
Companies that pay dividends often prefer to maintain or slowly grow their dividend rates as a demonstration of stability and to reward shareholders. Businesses that cut dividends may be entering a financially weaker state that, most times, is accompanied by a corresponding drop in the stock price.
The dividend payout ratio is one way to assess the strength of a company’s dividends. The calculation for a payout ratio is to divide dividend by net income and then multiply the sum by 100. When the payout ratio is lower, it is preferable as the company will be disbursing less of its net income to shareholder dividend payments. Further, as the business is paying out less, the firm and the payments are more sustainable. Conversely, companies with high payout ratios may have difficulty maintaining dividend payments, especially if an unforeseen event happens.
Exploring the Dividend Aristocrats: Long-Term Consistency in Payouts
Income-seeking investors often search for companies that demonstrate long histories of steadily growing dividend payments. These companies, dubbed dividend aristocrats, by definition must exhibit at least 25 years of consistent and significant annual dividend increases. Dividend aristocrats typically orbit among sectors like consumer products and health care, which tend to thrive in different economic climates. Kiplinger identified 65 high-dividend stocks to watch out for, in 2020. Some of the names that made the list include medical image machine maker Roper Technologies, paint maker Sherwin Williams, and alcohol distributor Brown-Forman.
Some of the best investment apps include features or functions that enable users to identify which companies offer dividend payouts.
Real World Example
Retail giant Walgreens Boots Alliance (WBA), the largest retail pharmacy in both the United States and Europe, stands out as a top dividend aristocrat. Its pharmacy business performed well, with 5.2% comparable sales growth and 5.9% comparable prescription growth. Given the company’s history of outperformance, analysts predict 8%-10% annualized growth in earnings per share, over the next several years. Furthermore, returns will likely be boosted by Walgreens’s 3.93% dividend yield, as well as a rising valuation.
The Bottom Line
The dividend rate is the total annual dividend payments, including non-recurring ones, found by multiplying each payout by the yearly frequency. Mature, profitable firms often pay dividends, while growth companies reinvest earnings.
A low payout ratio signals sustainability, and dividend aristocrats like Walgreens Boots Alliance show long-term dividend growth. Dividend yield moves inversely with stock price, affecting how attractive payouts appear.
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