What Is a Dividend Rate?
Let me explain what a dividend rate is: it's the total expected dividend payments from an investment, fund, or portfolio, expressed on an annualized basis, plus any additional non-recurring dividends you might receive during that period. Depending on the company's preferences and strategy, this rate can be fixed or adjustable.
You should know that the dividend rate is closely related to dividend yield and is sometimes used interchangeably.
Key Takeaways
- Dividend rate, expressed as a percentage or yield, is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
- Companies who generate a healthy profit often pay out dividends.
- The dividend payout ratio is one way to assess the sustainability of a company's dividends.
- A dividend aristocrat is a company that has increased its dividends for at least 25 consecutive years.
Understanding Dividend Rates
The dividend rate is an estimate of the dividend-only return on an investment like a stock or mutual fund. If the dividend amount stays the same, the rate will rise when the stock price falls, and it will fall when the price rises. This is why dividend rates can look unusually high for stocks that are dropping in value quickly.
New companies that are small but growing fast may pay lower average dividends than mature companies in the same sectors. Generally, mature companies that aren't growing quickly pay the highest dividend yields. Sectors like consumer non-cyclical stocks for staple items or utilities are examples where you'll find the highest average yields.
How Is a Dividend Rate Calculated?
To calculate the dividend rate for an investment, fund, or portfolio, you multiply the most recent periodic dividend payments by the number of payment periods in one year.
For instance, if a fund pays a dividend of 50 cents quarterly and also an extra 12 cents per share from a nonrecurring event, the dividend rate is $2.12 per year (50 cents times 4 quarters plus 12 cents equals $2.12).
Companies with substantial cash flows generally pay out dividends. On the other hand, rapidly growing businesses typically reinvest cash back into the company rather than paying dividends to shareholders. Cash-intensive companies producing essential consumer products like food, beverages, household items, or health care services usually spend less on growth, so they're more likely to distribute a percentage of income as dividends.
Dividend Payout Ratio
Companies that pay dividends often aim to maintain or slowly grow their dividend rates to show stability and reward shareholders. If a business cuts dividends, it may indicate a financially weaker state, usually leading to a drop in stock price.
The dividend payout ratio is a key way to assess the strength of a company's dividends. You calculate it by dividing dividends by net income and multiplying by 100. A lower payout ratio is preferable because the company is disbursing less of its net income, making the firm and its payments more sustainable. High payout ratios can make it hard to maintain dividends, especially during unforeseen events.
Dividend Aristocrats
If you're an income-seeking investor, look for companies with long histories of steadily growing dividend payments. These are called dividend aristocrats, which by definition have at least 25 years of consistent and significant annual dividend increases. They typically come from sectors like consumer products and health care, which perform well in various economic climates. In 2020, Kiplinger identified 65 high-dividend stocks to watch, including names like medical image machine maker Roper Technologies, paint maker Sherwin Williams, and alcohol distributor Brown-Forman.
Some of the best investment apps have features that help you identify companies offering dividend payouts.
Real World Example
Take retail giant Walgreens Boots Alliance (WBA), the largest retail pharmacy in the United States and Europe, as a top dividend aristocrat. Its pharmacy business has 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.
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