Should You Ponder over Dividend Growth Rate?

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Australian Economy, Macro Economics
  • Dividend yields are of importance for value stocks but dividend growth rate is equally important
  • To name a few, Westpac and BHP Billiton provide good dividend play scenarios

When doing a stock research and looking at good dividend payers, it’s not just the yields that need to be seen, it is equally important to see the dividend growth rate to assess long term potential. The dividend growth rate is a measure that relates to the value of a stock on the basis of expected dividends, and is defined as annualized percentage rate of dividend growth over a period of time. It supports the calculation of present value and helps in reaching the determination of stock trading over or under its fair value. This also supports an approach that assumes dividends to grow at a constant rate in long term. The dividend stocks thus become favorite among the value investors and the dividend growth rate becomes an integral part of the whole dividend story discussed often in investing principles. In view of these, let us compare a few stocks on the basis of their dividend paying scenario.

Australian entities that trade as American Depository Receipts (ADRs) on US Stock Exchange would be worth looking at. A key example is that of Westpac Banking Corp (ASX: WBC), which has a 5 year Dividend Per Share Growth of 2.63% and dividend yield of 6.46%. While the stock is under pressure owing to the Royal Commission into the Australian Financial Sector, various other factors including mortgage lending also weigh on the stock price movement.

Another interesting dividend stock trading as ADR on US Exchange is BHP Billiton Limited (ASX: BHP), which has about -0.01% as its 5 year Dividend Per Share Growth post the lull period around 2016. BHP has a dividend yield of 3.59% and is enjoying the rally in oil price and other commodities as seen in the last 2 years. The stock has surged up 43% in last one year (as at May 17, 2018) and pays good returns to shareholders.

ASX-listed Woodside Petroleum Limited (ASX: WPL) has an annual dividend yield of 3.66% which is fully franked like BHP. The stock has a dividend history available and the dividend growth rate can be calculated accordingly, which comes out to be in negative zone. Then there is this high dividend small-cap stock, Dicker Data Limited (ASX: DDR), which in line with last financial year and to provide consistency and certainty for investors, proposed to have interim dividends for FY18 of 4.40 cents per share fully franked. This would bring total proposed dividends to be paid in the FY18 to be 18.00 cents per share, reflecting an increase of 9.8% from FY17 dividend of 16.40 cents per share. If you average out the dividends paid in last five years, the group sits comfortably with over 20% as its 5 year Dividend Per Share Growth.

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Dividend Per Share for BHP, WBC, WPL, DDR (Source: Thomson Reuters)

Another stock, Insurance Australia Group Limited (ASX: IAG), has a good dividend history and lately reported for a decent 1H FY18 performance. The group has a dividend payout ratio of 52.5% of cash earnings and dividend rise of 7.7% as compared to previous corresponding period. Looking at historical dividend performance, we believe that the company will maintain its dividend payout ratio in the range of 50-80% in future while this might be subject to the forthcoming financial performance.

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IAG Dividend History (Source: Company Reports)

Thus, this measure that refers to the annualized percentage change that a stock’s dividend undergoes over a specific period of time can help investors evaluate the future scenario. Dividend growth talks a lot about a company, and it is one of the principal ways businesses communicate financial health and shareholder value. Thus, when looking at annual dividend growth rate for over a range of fiscal years, a negative or zero value for the last few years for instance makes the stock look a bit irrelevant from value-based investment standpoint unless other catalysts come into play to boost the returns.


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