What is a dividend rate?
The dividend rate is the total dividend payments expected from an investment, fund or portfolio expressed on an annualized basis, plus any additional non-recurring dividends an investor may receive during this period. Depending on company preferences and strategy, the dividend rate can be fixed or adjustable.
How is a dividend rate calculated?
Calculating the dividend rate of an investment, fund or portfolio consists of multiplying the last periodic dividend payments by the number of payment periods in a year.
For example, if an investment fund pays a dividend of 50 cents per quarter and also pays an additional dividend of 12 cents per share due to a non-recurring event from which the company benefited, the dividend rate is 2, $ 12 per year (50 cents x 4 quarters + 12 cents = $ 2.12).
Companies that generate large cash flows generally pay dividends. Conversely, fast-growing companies generally reinvest all of the cash generated in the business, not to pay dividends to shareholders. Cash-intensive businesses that produce essential consumer products such as food, beverages and household items, and those that provide health care, for example, typically spend less to grow their businesses. Therefore, these companies are more likely to distribute a percentage of the income to shareholders in the form of dividends.
Key points to remember
- The dividend rate is the total of the dividend payments expected from an investment, fund or portfolio expressed on an annualized basis.
- Companies that generate healthy profits often pay dividends.
- The dividend payout ratio is a way to assess the sustainability of a company’s dividends.
- A dividend aristocrat is a business that has increased its dividends for at least 25 consecutive years.
Dividend payout ratio
Dividend paying companies often prefer to maintain or slowly increase their dividend rates as a demonstration of stability and rewarding shareholders. Companies that reduce their dividends can enter a state of financial weakness which, most of the time, is accompanied by a corresponding fall in the share price.
The dividend payout ratio is a way to assess the strength of a company’s dividends. Calculating a payout ratio is done by dividing the dividend by net income, then multiplying the sum by 100. When the payout ratio is lower, it is better for the company to pay less of its net profit to dividends paid to shareholders. In addition, as the business pays less, the business and the payments are more sustainable. Conversely, companies with high payout ratios may find it difficult to maintain dividends, especially if an unforeseen event occurs.
Income-seeking investors often look for companies that have a long history of steadily growing dividend payments. These companies, known as dividend aristocrats, must by definition display at least 25 years of regular and significant increase in the dividend. Dividend aristocrats generally orbit between sectors such as consumer products and health care, which tend to thrive in different economic climates. Kiplinger has identified 57 high dividend stocks to watch in 2019. Some of the names that made the list include medical imaging machine maker Roper Technologies, paint maker Sherwin Williams and liquor distributor Brown-Forman.
Example from the real world
Retail giant Walgreens Boots Alliance (WBA), the largest retail pharmacy in the United States and Europe, stands out as a top-dividend aristocrat. Its pharmacy activities performed well, with comparable sales growth of 5.1% and comparable prescriptions growth of 4.0%. Given the company’s track record of outperformance, analysts forecast annualized growth of 8% to 10% in earnings per share over the next few years. In addition, returns are likely to be boosted by the 2.5% dividend yield from Walgreens, as well as an upward valuation.