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A Beginners Guide to the Dividend Growth Rate

The following is a guest post from Blaine Watkins at Dividend Geek. Blaine is a voracious reader of investing books and has been educating himself about the subject for decades. His philosophy aligns with much of what I teach, mainly finding stocks at a discount to intrinsic value and reinvesting the growing dividend.

One of the key metrics that I use when evaluating companies to invest in is the Dividend Growth Rate (DGR). It is one of the primary metrics used by a small but growing community of investors that use the Dividend Growth Investing methodology.

dividend growth rate

You may not have heard of the DGR. You will not find it on Google or Yahoo finance pages, because it only applies to 20% of actively traded stocks in the U.S. I happened to stumble upon the DGR five years ago while researching a company on the internet.

Since then dividend growth investing has transformed the way I invest. But first a little context about my investing background, and a valuable lesson that I learned along the way to my discovery of the DGR.

My lifelong passion has been finance, investing and wealth creation. I find the world of investing fascinating. Not only is there an infinite amount of things to study and learn, but consistently making money every year in the stock market is extremely difficult. The allure for me was the challenge to find a way to be consistently successful.

Over the past 20 years I have read nearly every book on stock market investing. During much of that time I experimented with various investing methods (value, growth, dollar cost averaging, dogs of the Dow, sector rotation, high-yield dividend income – to name a few), trying to find a system that worked the best for me.

I lost money on some methods and made money on others; overall I achieved some limited success of positive returns, but underperformed the market average.

The real value during this time came in the “education” that I received through all of the experience, some of which was very painful. The valuable lesson I learned that I pass along to you is that when it comes to investing money, everyone is different. What works for some people may not for others and vice versa. You need to find a system that works for you!

Many of the methods that I tried and failed at, others have tried and succeeded. Of the methods that did work for me I was not fully satisfied with the results. Then I learned about the key metric of dividend growth investing the Dividend Growth Rate, which fit my investing risk tolerance, time horizon and desire to achieve financial independence through income, and it all clicked for me. I’d found what worked for me, and maybe it will work for you too.

Most long-term investment systems utilize reinvesting dividends during your accumulation phase, this is basically a form of compound interest – that’s nothing new. However, Dividend Growth Investing is unique in that it combines the power of the dividend growth rate with compound interest to turbo-charge the compounding effect.

The combination of these two elements is the mathematical force that produces inevitable, ever-increasing returns. The DGR drives the turbo-charging. The longer, higher this rate can be sustained the faster your investments will compound.

Here is a visual representation of putting these two powerful forces together.

dividend growth compound interest

Simply put the Dividend Growth Rate is the rate at which companies raise their dividend payout. For example, let’s look at Johnson & Johnson (JNJ). In 2014 JNJ paid out $2.76 per share to its shareholders, and then in 2015 raised their annual dividend payment to $2.95 per share.

In a spreadsheet the formula is: (2.95 – 2.76) / 2.76 = 0.0688

A 6.88% one year increase. Not bad! When is the last time your employer gave you a raise over 6%? If you plan to live off of your dividend income in retirement like I do, then JNJ just gave you a 6.88% raise, which is more than double the long-term average inflation rate of 3.1%.  

Of course if a company happens to raise its dividend one year, how is that meaningful to an investor? After all, there are companies that raise, maintain, lower, or cut their dividend on any given year. Where the Dividend Growth Rate matters is in the long-term year-over-year trend. 

There are many companies that have raised their dividend for over 25 consecutive years. These companies have been nicknamed “Dividend Champions” and are typically core holdings for dividend growth investors. Raising dividends every year is the foundation of Dividend Growth Investing.

Now, let’s take a look at JNJ dividend history, well at least a part of it, because JNJ has raised its dividend for 54 consecutive years! Here are the actual annual dollar per share amounts that JNJ has paid for the past 15 years.


Here’s what the year-over-year dividend growth rates are for those same 15 years.


Okay that’s a lot of numbers to look at, but at a glance there is a story told in this trend. The first 8 years (2001-2008) JNJ was increasing their dividends by double-digit rates. Then starting in 2009 at the time of great recession and lasting the next 7 years (2009-2015) JNJ dropped its DGR to more sustainable single digits. I like to review the year-over-year DGR history when analyzing a company.

Another useful way to look at the DGR metric is by the 1-yr, 3-yr, 5-yr, and 10-yr DGR averages. This allows you to see how high or low the rate is over a given time period, and if there are any interesting trends.

dgr jnj

In general, I prefer to invest in companies that have a minimum 5% DGR. If the company can maintain or increase that DGR into the future, then the dividend income being used to live off of during retirement, will at worst maintain, but more likely increase my standard of living since it is above the 3.1% average rate of inflation. I look at all four averages (1, 3, 5, 10 year), but feel that the 5-Year DGR average, is the best overall indicator. It is in the proverbial Goldilocks ‘just right’ zone, not too low, and not too high.

Remember, that the dividend growth rate is just one of many things to evaluate when researching prospective investments. But if you are a long-term investor, with a focus on increasing your income, the dividend growth rate is a valuable metric to evaluate.

All the best!

dividend geek

Blaine Watkins


Note: You can find all of the dividend growth rate stats from David Fish’s U.S. Dividend Champions spreadsheet. Credit source: David Fish for all DGR stats listed in this article.