What Is a Dividend Rate?
The dividend rate represents the total expected annual dividend payments from an investment, fund, or portfolio, inclusive of any additional non-recurring dividends received during the year. Companies may prefer a fixed or adjustable dividend rate based on their financial strategy. It’s closely aligned with the term ‘dividend yield,’ and the two are often used interchangeably.
Key Takeaways
- Dividend rate is a financial metric that shows the annual dividend payout relative to a stock’s price, expressed as a percentage or yield.
- Companies generating healthy profits often distribute dividends as a way to reward shareholders.
- The dividend payout ratio is a reliable measure to gauge the sustainability of a company’s dividend distributions.
- Dividend aristocrats are firms recognized for consistently increasing their dividends for an extended period (a minimum of 25 years).
Understanding Dividend Rates
The dividend rate estimates the dividend-only return from investments, such as stocks or mutual funds. In a scenario where the dividend amount remains constant, the rate amplifies when the stock price falls and decreases when the stock price rises. Rapidly declining stock prices can result in unusually high dividend rates.
Small, fast-growing companies tend to pay lower average dividends compared to mature companies in similar sectors. Typically, mature companies that experience slower growth offer the highest dividend yields. Sectors like consumer non-cyclicals and utilities generally have stocks that pay large dividends.
How Is a Dividend Rate Calculated?
The dividend rate calculation involves multiplying the most recent periodic dividend payments by the number of periods in a year.
For example, if an investment fund pays a quarterly dividend of $0.50 and an additional non-recurring dividend of $0.12 per share due to a special event, the annual dividend rate would be $2.12 ($0.50 x 4 quarters + $0.12 = $2.12).
Companies generating substantial cash flows typically pay dividends, while fast-growing businesses reinvest their earnings. Firms producing essential consumer products or healthcare items are more likely to distribute part of their income as dividends.
Dividend Payout Ratio
Companies typically opt to either maintain or gradually increase their dividend rates as a sign of financial health and to reward shareholders. A reduction in dividends may signify financial instability and often leads to a corresponding drop in stock price.
The dividend payout ratio is evaluated by dividing the dividend by net income and multiplying by 100, providing insights into a company’s ability to sustain its dividend payments. Lower payout ratios are generally favorable, suggesting greater sustainability and fewer distributions relative to net income.
Dividend Aristocrats
Dividend aristocrats are companies renowned for their extended history of increasing dividend payments, sustaining this growth for at least 25 years. These companies are often found in sectors like consumer products and healthcare, which remain robust through various economic cycles. Leading examples include Roper Technologies, Sherwin Williams, and Brown-Forman.
Real World Example
Walgreens Boots Alliance (WBA): A standout dividend aristocrat, Walgreens Boots Alliance, the largest retail pharmacy in the US and Europe, boasts impressive growth metrics, including 5.2% comparable sales growth and 5.9% prescription growth. Analysts project 8%-10% annualized earnings growth over the coming years, bolstered by a 3.93% dividend yield and rising valuation.
Related Terms: Dividend Yield, Return on Investment, Payout Ratio, Dividend Aristocrats.
References
- Kiplinger. “65 Best Dividend Stocks You Can Count On in 2020”.
- Walgreens Boots Alliance. “Walgreens Boots Alliance Fiscal 2021 First Quarter Results Exceed Expectations”.
