What Dividend Growth Actually Measures
Dividend growth means that the dividend paid per share increases over time.
For example, if a company pays an annual dividend of 20p per share one year and 22p per share the next, the dividend has grown because the amount associated with each share has increased.
The important part of that definition is per share.
Receiving more dividend income does not necessarily mean that the company’s dividend has grown. The amount an investor receives can also change because the number of shares they own has changed.
Suppose a company continues paying an annual dividend of 20p per share. An investor holding 1,000 eligible shares would receive:
1,000 × £0.20 = £200
Another investor holding 1,200 shares would receive:
1,200 × £0.20 = £240
The second investor receives £40 more, but there has been no dividend growth. The company still pays 20p per share.
Now suppose the first investor continues to own 1,000 shares but the dividend increases from 20p to 22p per share. The payment associated with that holding becomes:
1,000 × £0.22 = £220
This time the increase comes from the dividend per share itself changing.
Keeping these two effects separate is fundamental to understanding dividend growth:
Dividend growth measures what has happened to the dividend per share, not simply what has happened to an individual investor’s total dividend income.
How Is Dividend Growth Calculated?
Dividend growth is usually expressed as a percentage showing how much the dividend per share has changed compared with an earlier equivalent period.
The formula is:
Dividend Growth Rate = (New Dividend − Previous Dividend) ÷ Previous Dividend × 100
Suppose a company’s annual dividend increases from 20p per share to 22p per share.
The cash increase is:
22p − 20p = 2p
That 2p increase is then compared with the previous 20p dividend:
2p ÷ 20p × 100 = 10%
The dividend per share has therefore increased by 2p, representing a 10% dividend growth rate.
A dividend has increased from 20p per share to 22p per share. The percentage growth is calculated by comparing the 2p increase with the previous 20p dividend. The dividend increased by 2p per share. That 2p increase is equal to 10% of the previous 20p dividend, so the dividend growth rate is 10%. The percentage is measured against the previous dividend, which is why the starting value matters.Calculating Dividend Growth
It is important to compare equivalent figures.
If you are calculating annual dividend growth, you would normally compare the total dividend per share for one year with the equivalent total for another year rather than comparing unrelated individual payments.
The percentage tells you how large the change was relative to the dividend that was previously being paid.
Why the Starting Dividend Matters
Knowing that a dividend increased by a particular cash amount does not, by itself, tell you how quickly the dividend grew.
Consider two dividends that both increase by 2p per share.
20p to 22p
The cash increase is 2p per share. Compared with the previous 20p dividend, that represents dividend growth of 10%.
£1.00 to £1.02
The cash increase is also 2p per share. Compared with the previous £1.00 dividend, however, that represents dividend growth of only 2%.
The cash increase is identical in both examples, but its significance depends on the dividend it started from. Percentage growth puts the cash change into context.
This is why saying that a dividend “increased by 2p” provides different information from saying that it “grew by 10%”.
The first tells you the cash change per share. The second measures that change relative to the previous dividend.
The same principle applies to larger increases. A larger cash increase does not automatically mean a higher percentage growth rate if the starting dividend is also substantially larger.
Does Dividend Growth Stay the Same Every Year?
No. Dividend growth does not operate like a fixed interest rate.
A company can make a relatively large increase one year, a smaller increase the next, leave its dividend unchanged for a period and then increase it again later.
Consider a simplified five-year history in which the annual dividend per share changes from 20p to 22p, then 23p, remains at 23p and finally increases to 24p.
This example shows how the dividend per share can increase at different rates, remain unchanged for a period and then begin growing again. Dividend growth does not have to follow a constant rate. In this example, the dividend grows quickly at first, increases more slowly the following year, remains unchanged for one year and then begins growing again. The percentages are rounded. This is an illustrative example rather than a forecast of future dividend growth.How Dividend Growth Can Change From Year to Year
The dividend is higher at the end of the five-year period, but the rate at which it changed was far from constant.
That distinction matters. The direction of a dividend and its rate of growth are not the same thing.
A dividend can remain higher than it was several years earlier even if the most recent year produced no growth at all.
Historical dividend growth should therefore not simply be carried forward as though it were a fixed rate. A 10% increase in one year does not establish a 10% increase for the following year.
Can Dividend Growth Be Negative?
Yes.
The same percentage-change calculation used to measure an increase can also measure a reduction.
Suppose a company’s annual dividend falls from 20p per share to 15p per share.
The change is:
15p − 20p = −5p
Compare that reduction with the previous 20p dividend:
−5p ÷ 20p × 100 = −25%
The dividend has therefore fallen by 5p per share, representing a 25% reduction. Expressed as a growth rate, this is −25% dividend growth.
This gives us three possible directions:
- a higher dividend produces positive growth;
- an unchanged dividend produces 0% growth;
- a lower dividend produces negative growth.
Negative growth can occur even after several years of dividend increases. A previous pattern of growth does not prevent a company from reducing a later payment.
The reasons behind such a decision are a separate subject. Why Can Companies Cut or Stop Dividends? explains why a company might reduce, suspend or discontinue its dividend.
Dividend Growth vs Dividend Yield
Dividend growth and dividend yield both involve dividends, but they answer different questions.
Dividend growth asks how the dividend per share has changed. Dividend yield asks how large the annual dividend is relative to the current share price.
Dividend Growth
If the annual dividend rises from 20p to 22p per share, the dividend growth rate is 10%. The calculation compares the new dividend with the previous dividend and does not require the share price.
Dividend Yield
If the annual dividend is 22p and the share price is £5.50, the dividend yield is 4%. The calculation compares the annual dividend with the current share price.
Dividend growth measures change over time. Dividend yield measures the dividend relative to the share price. A dividend can grow while its yield moves in a different direction.
Using the yield example:
£0.22 ÷ £5.50 × 100 = 4%
The important difference is the denominator.
Dividend growth uses the previous dividend as its comparison point. Dividend yield uses the share price.
This means a dividend can grow while its yield falls. If the dividend rises but the share price rises by a larger proportion, the resulting yield could be lower.
The reverse is also possible. A falling share price can increase the calculated dividend yield even when the dividend per share has not increased.
A higher dividend yield therefore does not automatically indicate stronger dividend growth, and a lower yield does not necessarily mean the dividend has been reduced.
Dividend Yield Explained covers the yield calculation and the relationship between the dividend and share price in more detail.
Why Dividend Growth Can Matter Over Time
A single dividend increase changes the amount paid per share for one period. If increases occur over a longer period, the difference between the original dividend and the later dividend can become more substantial.
Suppose an investor continues to own 1,000 shares.
At an annual dividend of 20p per share, the holding produces:
1,000 × £0.20 = £200
If the annual dividend later reaches 25p per share while the investor still owns the same 1,000 shares, the dividend associated with the holding becomes:
1,000 × £0.25 = £250
The investor has not needed to acquire additional shares for the dividend income associated with the holding to increase. The difference comes entirely from the dividend per share rising from 20p to 25p.
This is one reason the per-share distinction matters so much. It allows changes in the company’s dividend to be separated from changes in an individual investor’s holding.
The path between 20p and 25p may not be smooth. There could be larger increases, smaller increases, periods of no growth or reductions along the way.
The useful principle is therefore straightforward: dividend growth can increase the dividend income associated with an unchanged holding over time, but the rate and continuation of that growth are uncertain.
Does Past Dividend Growth Predict Future Growth?
No.
A history of dividend increases tells you what a company distributed in the past. It does not determine what the company will distribute next.
A company that has increased its dividend for several years could make another increase, make a smaller increase, leave the dividend unchanged, reduce it or stop paying dividends.
This means a historical dividend growth rate should not simply be projected forward. If the dividend grew by 5% last year, there is no rule requiring another 5% increase this year.
Historical information can still be useful for understanding how a dividend has behaved. The important distinction is between describing a previous pattern and predicting a future payment.
Future dividends depend on future company decisions and circumstances rather than on a mathematical requirement to continue the previous growth rate.
Are Dividends Guaranteed? looks more closely at the uncertainty surrounding future payments, while Why Can Companies Cut or Stop Dividends? explains some of the reasons a company may reduce or discontinue them.
Dividend Growth vs Dividend Reinvestment
Dividend growth can increase the income associated with an unchanged number of shares. Dividend reinvestment works differently because it can change the number of shares or units held.
Dividend Growth
The dividend per share changes. For example, an investor might continue owning 1,000 shares while the annual dividend increases from 20p to 22p per share.
Dividend Reinvestment
The size of the holding changes. For example, an investor might use a dividend to increase a holding from 1,000 shares to 1,040 while the dividend itself remains at 20p per share.
Dividend growth changes what each share pays. Dividend reinvestment changes how many shares or units you own. They can happen together, but neither mechanism causes the other.
This distinction explains why an investor’s total dividend income can increase without the dividend per share growing.
If previous dividends have been reinvested and the investor now owns more shares, a later dividend payment could be larger simply because it applies to a larger holding.
The reverse distinction is equally important. If the dividend rises from 20p to 22p while the investor continues owning the same 1,000 shares, the larger payment comes from dividend growth rather than reinvestment.
Both effects can occur at the same time, but they should still be measured separately.
What Is Dividend Reinvestment? explains the reinvestment transaction itself. How Dividend Reinvestment Compounds Over Time then explores what can happen when reinvestment is repeated across multiple dividend payments.
Explore Dividend Growth and Reinvestment
The Dividend Reinvestment Calculator can help illustrate what happens when assumptions about dividends and reinvestment are changed.
For example, you can compare a scenario where dividends remain unchanged with one where the assumed dividend changes over time, while also exploring what happens when payments are reinvested rather than taken as cash.
This can help separate two different effects: changes in the dividend associated with each share and changes in the number of shares or units held.
The calculator is an illustration rather than a forecast. Future dividends and investment returns cannot be known from a historical growth rate, and investment values can rise or fall. More broadly, investment returns can come from distributions such as dividends as well as changes in an investment’s value.
For the wider distinction between these two sources of return, Dividend Income vs Capital Growth explains how investment income differs from changes in market value.
You can also return to the Saving & Investing Hub to explore Calfiny’s wider investment guides and calculators.
Conclusion
Dividend growth measures how the dividend per share changes over time. It is calculated by comparing a new dividend with the previous dividend and expressing the change as a percentage.
That growth can be positive, zero or negative, and it does not have to remain at the same rate from year to year. A company’s previous dividend history can describe what happened in the past without determining what it will pay in the future.
Keeping dividend growth separate from dividend yield and dividend reinvestment makes the concept much easier to interpret: growth changes what each share pays, yield compares that payment with the share price, and reinvestment can change how many shares or units you own.
