Calculating Dividend Growth Rate Ratios

Introduction

You're valuing dividend payers and need a repeatable way to turn historical payouts into forward assumptions, so this brief shows how to calculate dividend growth rate ratios and use them in valuation. You're reading if you're an investor, analyst, or strategist who needs a practical, repeatable method to rank names and set action triggers. The outcome: you'll know the exact data needs (annual dividend per share for a chosen window - use at least 5 years ending FY2025), the core formula (compound annual growth rate, CAGR = (D_end / D_start)^(1/n) - 1), and clear decision triggers (for example, CAGR > 5% with payout ratio < 60% suggests sustainable growth; CAGR < 0% or payout > 100% flags risk). Here's the quick math: if dividends rose from $1.00 in 2019 to $1.40 in FY2025 across 6 years, CAGR = (1.4/1)^(1/6)-1 = 5.8%. What this hides: special dividends and buybacks can distort rates, so adjust for one-offs. Next step: collect annual DPS and payout ratios through FY2025 and run a sensitivity test - then defintely document your triggers.

Key Takeaways

• Data first: collect annual DPS (≥5 years ending FY2025), EPS, shares and payout ratios; adjust for splits, special/supplemental dividends and M&A.
• Core formula: use CAGR = (D_end / D_start)^(1/n) - 1 to convert historical DPS into a smoothed forward growth rate.
• Decision triggers (examples): DPS CAGR > 5% with payout < 60% suggests sustainable growth; DPS CAGR < 0% or payout > 100% flags risk and requires deeper review.
• Sanity checks: compare DPS CAGR to EPS CAGR and Sustainable Growth Rate (SGR = ROE × retention); if DPS growth > SGR or EPS growth, increase scrutiny.
• Cash‑flow and quality: always verify dividend cover (EPS/DPS), payout trends and free cash flow - rising payout with falling earnings or one‑offs distorts signals.

Calculating Dividend Growth Rate Ratios

You're checking whether a company's dividend raises are sustainable; focus first on the relationship between dividend per share (DPS) growth, earnings, and payout behavior. Direct takeaway: compute DPS CAGR, compare to EPS CAGR and the sustainable growth rate (SGR); if DPS CAGR exceeds SGR or payout trends above 70%, flag for deeper cash‑flow checks.

Dividend growth rate and compound annual growth rate (CAGR)

Dividend growth rate is the year‑over‑year percentage change in DPS; use it to spot volatility. For a smoothed view, use the compound annual growth rate (CAGR), which removes year‑to‑year noise and shows the equivalent steady growth rate over N years.

Steps and best practices:

• Pull DPS for the start and end of your window (use fiscal years, e.g., 2021-2025).
• Remove special or one‑time dividends and adjust DPS for stock splits or share consolidations.
• Compute CAGR with the formula: DPS_end / DPS_start ^(1/years) - 1.

Here's the quick math using a 5‑year window: if DPS in fiscal 2020 was $1.00 and in fiscal 2025 is $1.50, CAGR = (1.50 / 1.00)^(1/5) - 1 = 8.45%. What this estimate hides: big mid‑period cuts or special dividends-check the annual series.

One clean line: use CAGR for comparability, YoY for volatility checks.

Payout ratio (dividends / net income)

Payout ratio measures how much of reported earnings are paid as dividends; it's a core check on dividend durability. Use per‑share or aggregate figures consistently: Dividends per share / EPS, or Total dividends / Net income.

Steps and best practices:

• Use diluted EPS and trailing 12‑month (TTM) or fiscal‑year EPS to match your DPS series.
• Exclude one‑time gains/losses from EPS and remove special dividends from total dividends.
• Cross‑verify with cash dividends paid in the cash‑flow statement (financing cash flows).

Example quick calc (2025 fiscal): DPS = $1.50, EPS = $2.20 → payout = 1.50 / 2.20 = 68.18% (report as 68%). If aggregate: dividends paid $150m vs net income $220m → same ratio. If payout > 70%, defintely priority‑check free cash flow and one‑offs.

One clean line: payout shows current strain; validate with cash payout and recurring earnings.

Retention ratio and link to future growth

Retention ratio is the portion of earnings retained in the business: 1 - payout ratio. It's the funding source for reinvestment and ties directly to the sustainable growth rate (SGR), defined as Return on Equity (ROE) × retention ratio.

Steps and best practices:

• Compute retention = 1 - payout (use decimals). If payout = 68.18%, retention = 31.82%.
• Use a normalized ROE (3-5 year average) to avoid distortions from a single year.
• Calculate SGR = ROE × retention. Treat SGR as an upper bound for dividend growth absent external financing or asset sales.

Example quick math (2025 fiscal): ROE = 12%, retention = 31.82% → SGR = 12% × 31.82% = 3.82%. If DPS CAGR is 8.45% but SGR is 3.82%, the gap signals reliance on buybacks, debt, or one‑offs-raise scrutiny.

One clean line: SGR gives a reality check-dividend growth above SGR needs explanation.

Next step: You - build a 5‑year DPS/EPS sheet for target stocks; Finance - compute payout, retention, and SGR by Friday.

Data selection and cleanup

You're building dividend-growth ratios and need clean, auditable inputs so your growth math doesn't lie to you. Pull DPS, shares, and EPS from primary filings, flag one-offs, and normalize per‑share figures before any CAGR or ratio work.

Sources and where to trust the numbers

Start with primary sources: SEC EDGAR and the company 10‑K/10‑Q for official DPS, declared dividends, and weighted average shares outstanding. Use terminal data (Bloomberg, FactSet) for fast pulls and Yahoo Finance for quick cross-checks, but treat them as secondary.

Steps to follow:

• Download the most recent 10‑K and last four 10‑Qs
• Pull raw dividend declarations by date
• Capture weighted average shares and basic/diluted EPS
• Record the filing timestamp and URL for audit

Best practice: always save a PDF of the exact filing page where DPS and shares are reported. One-liner: primary filings beat scraped tables, always.

Choose the right time window and why it matters

Use windows of 1, 3, 5, and 10 years depending on your goal: 1-year shows shifts, 3-year captures short cycles, 5-year smooths medium-term, 10-year shows long-term policy. Run all windows and compare - divergence is a red flag.

Practical guidance:

• For momentum checks, use 1-3 years
• For valuation inputs, prefer 5 years
• For strategic, cyclical firms, prefer 10 years
• Align windows to fiscal year ends (not calendar quarters)

Data-step: pull DPS and EPS on a fiscal-year basis for each year in your window; if fiscal year changed, note the change. One-liner: shorter windows show recent shifts, longer ones show true policy.

Adjustments and quality checks to make the series usable

Normalize dividends before calculating growth. Remove or separately tag special/supplemental dividends, convert aggregate cash payouts to per-share DPS, and adjust historical DPS for splits and M&A-driven share-count changes.

Exact steps:

• Identify specials in footnotes; subtract from annual DPS
• Adjust DPS for stock splits (rescale pre-split DPS)
• For M&A, normalize to pro forma shares if deal changed float
• Recompute DPS = total cash dividends / weighted average shares
• Recompute EPS = net income / weighted average shares

Quality checks to run and log:

• Cross-verify DPS with filings and at least one terminal
• Reconcile total dividends paid to cashflow statement
• Compare reported EPS to your net income divided by shares
• Flag years where payout ratio jumps > 15 percentage points
• Document any restatements or accounting changes

Here's the quick math to flag issues: if your recomputed payout = (annual DPS × shares) / net income, and that deviates > 10% from reported payout, pause and investigate. What this estimate hides: off‑balance sheet adjustments and one‑time items can still skew ratios - so always keep the one‑off layer available. One-liner: if you can't trace a mismatch to a footnote in 15 minutes, mark the security for deeper review and defintely avoid using that year's DPS for CAGR.

Calculation methods

You're trying to measure dividend momentum and test whether a payout is sustainable - here's the quick takeaway: use year‑over‑year (YoY) checks to spot volatility, use CAGR to see the smoothed trend, use regression when series are noisy, and use the dividend discount (Gordon) back‑solve to see what the market is pricing.

YoY growth: simple change for volatility checks

Start with the raw, annual per‑share dividend (DPS) series and compute YoY growth as (DPS_t / DPS_{t-1}) - 1. Pull annual DPS for the fiscal years you care about (for example, FY2024 and FY2025), make the split/special dividend adjustments, then calculate each year's percent change.

Steps to follow:

• Pull DPS for each fiscal year (use filings first).
• Remove one‑offs and special dividends; mark them separately.
• Adjust for stock splits so DPS is comparable.
• Compute YoY = (DPS_thisYear / DPS_lastYear) - 1.

Practical example: if DPS in FY2024 was $1.20 and DPS in FY2025 is $1.32, YoY = ($1.32 / $1.20) - 1 = 10%. One‑liner: use YoY to flag one‑time jumps or cuts; don't use YoY alone to set a growth assumption.

Best practices and caveats: flag any YoY move > 20% for review (could be special dividend or payout policy change); if series is highly volatile, prefer multi‑year smoothing. Also, defintely cross‑check that DPS is on a per‑share basis, not total cash paid.

CAGR: smoothed long‑run growth for modeling

Use CAGR (compound annual growth rate) to summarize a multi‑year percent change with the formula (DPS_end / DPS_start)^(1 / years) - 1. CAGR tells you the constant annual growth rate that links the start and end values and is what you should use in models when you want a steady implicit growth assumption.

Step checklist:

• Choose window (1, 3, 5, 10 years) - longer windows smooth cycles, shorter windows reflect recent regime shifts.
• Use adjusted DPS_start and DPS_end (exclude specials or roll them into a separate metric).
• Compute CAGR = (DPS_end / DPS_start)^(1 / N) - 1.
• Compare DPS CAGR to EPS CAGR over the same window for sustainability checks.

Worked example: DPS_start FY2020 = $0.90, DPS_end FY2025 = $1.35, N = 5 years. CAGR = (1.35 / 0.90)^(1/5) - 1 ≈ 8.4%. One‑liner: use CAGR as your baseline growth input - it's simple, defensible, and easy to audit.

What this hides: CAGR masks timing (a big increase in year 4 looks the same as steady gains). Always pair CAGR with YoY checks and look at EPS CAGR; if DPS CAGR > EPS CAGR long‑term, the payout may be unsustainable unless buybacks or M&A change the picture.

Regression trend and implied growth (Gordon): smooth noise and read market expectations

Regression: run a linear trend on the DPS series or a log (ln) regression to estimate a steady percent growth. Regress ln(DPS_t) = a + b·t; then approximate annual growth as e^b - 1. Use this when single years swing and you want a statistically smoothed growth estimate.

Regression steps and checks:

• Use 5-10 annual DPS observations, after adjusting for specials.
• Run both linear (level) and log (percent) regressions; log gives a constant % growth.
• Check R² and residuals; if R² < 0.4, treat trend with caution.
• Consider robust regression or Huber weighting if outliers distort slope.

Numeric demo: DPS series [$0.90, $1.00, $1.10, $1.20, $1.35] over five years gives a log‑slope b ≈ 0.101, so growth ≈ e^0.101 - 1 ≈ 10.7%. One‑liner: regression gives a defensible, auditable growth rate when the series is noisy.

Implied growth from Gordon (Dividend Discount Model): for a stable dividend stock, market price P0 = D1 / (r - g), rearranged to g = r - D1 / P0. Use D1 as next‑12‑month dividend expectation and r as your cost of equity (CAPM or implied market rate).

Steps to back out implied g:

• Set D1 = expected next‑year DPS (use company guidance if available).
• Use current market price P0 (trade close) and your r (cost of equity).
• Compute implied g = r - D1 / P0.
• Compare implied g to DPS CAGR, EPS CAGR, and Sustainable Growth Rate (SGR = ROE × retention).

Worked example: P0 = $30, D1 = $1.32 (FY2025 forward DPS), r = 8.0%. Implied g = 8.0% - (1.32 / 30) = 8.0% - 4.4% = 3.6%. One‑liner: implied g shows what the market is pricing - if implied g materially exceeds historical CAGR or SGR, dig into assumptions.

Decision triggers and best practices: flag names where implied g > CAGR + 200bp or where implied g > SGR without clear operational drivers. Always cross‑check with free cash flow (FCF) and payout ratio - if payout > 70%, prioritize FCF analysis before accepting any implied growth story. Next step: you build a 5‑year DPS/EPS sheet and flag stocks where DPS CAGR exceeds SGR and payout > 60%; Research: draft the sheet by Friday.

Ratios and interpretation

You're testing whether a dividend is sustainable; the quick takeaway: if dividend growth outpaces earnings growth and the dividend exceeds what the company can sustainably finance (its sustainable growth rate), treat the dividend as at-risk and dig into cash flow.

Dividend growth vs earnings growth

One clean line: dividend growth should not outpace earnings growth long term.

Why it matters: dividends come from earnings (or cash). If dividends (DPS) grow faster than earnings (EPS), the gap must be covered by reserves, debt, or one-offs. For a practical check use the same window for DPS and EPS - typically 3 to 5 years - and adjust for share count changes and special dividends.

Steps and quick math using FY2025 example values:

• Pull DPS start (FY2020) and end (FY2025)
• Compute DPS CAGR: (DPS_end / DPS_start)^(1/years) - 1
• Compute EPS CAGR same way

Example: DPS 2020 = 0.80, DPS 2025 = 1.20 → DPS CAGR ≈ 8.45%. EPS 2020 = 2.50, EPS 2025 = 2.00 → EPS CAGR ≈ -4.4%. Here DPS growth exceeds EPS growth by ~12.8 percentage points; that's a clear warning.

Best practices: use TTM (trailing twelve months) EPS for recent checks; strip specials; use median growth to avoid single-year noise; flag any case where DPS CAGR exceeds EPS CAGR by more than 3 percentage points.

Dividend payout trend

One clean line: rising payout while earnings fall is a red flag.

What to watch: payout ratio = dividends / net income (or DPS / EPS). A rising payout can be fine if earnings are rising, but dangerous when earnings are flat or falling. Also prefer cash dividends / free cash flow payout to earnings-based payout for capital-intensive firms.

Steps and decision triggers:

• Compute annual payout and TTM payout
• Plot 3-5 year trend and remove special dividends
• If payout > 70%, run an immediate cash flow check

FY2025 example: DPS 1.20 and EPS 2.00 → payout = 60%. If EPS fell from 3.00 in 2021 to 2.00 in 2025 while DPS rose from 0.90 to 1.20, payout rose from 30% to 60% - that trajectory increases risk. If payout climbs >20 percentage points over three years while EPS declines, engage management or lower your fair value.

Best practices: prefer dividends / free cash flow for sustainability; check net debt and interest coverage; watch buybacks that conceal true payout policy. This is defintely worth flagging early.

Dividend cover and sustainable growth rate

One clean line: target dividend cover ≥ 2 and use SGR as an upper bound for dividend growth.

Dividend cover (EPS / DPS) is a simple health check: cover < 2 raises a red flag for many investors because it leaves little cushion for downturns. Example FY2025: EPS 2.00 and DPS 1.20 → cover = 1.67 (flag).

Sustainable growth rate (SGR) formula: SGR = ROE × retention ratio, where retention ratio = 1 - payout ratio. SGR estimates how fast earnings can grow without new equity.

SGR quick math with FY2025 values: ROE = 12%, payout = 60% → retention = 40% → SGR = 0.12 × 0.40 = 4.8%. If DPS CAGR is 8.45% while SGR is 4.8%, dividend growth is above what internal earnings can support.

• Compute ROE using average equity for FY2025
• Use retention = 1 - payout (based on TTM)
• Treat SGR as an upper bound, not a precise forecast

Limits and actions: SGR assumes constant ROE and no external financing; it hides capex, M&A, and cyclical swings. If DPS CAGR > SGR, require evidence of external funding, improving ROE, or robust free cash flow coverage before accepting the dividend as sustainable.

Practical steps and quick math

You're checking dividend durability across a 5‑year window; here's the short take: pull clean DPS and EPS, compute CAGRs, compare to the Sustainable Growth Rate, and flag any dividend growth that outpaces what earnings and retention can support.

Pull data, clean it, and compute DPS and EPS growth

Step 1: get annual Dividends Per Share (DPS) and diluted EPS for the fiscal years you chose - common windows are 1, 3, 5, and 10 years; for FY2025 work backward from FY2025 end-of-year values. Use SEC EDGAR 10‑Ks, company filings, or a trusted terminal and export to a sheet.

Best practices:

• Prefer fiscal-year totals (not interim) inconsistent reporting.
• Remove special/supplemental payouts - treat them separately.
• Adjust DPS for splits and share-count changes.
• Cross-check DPS against press releases and the cash dividend table in the 10‑K.

Here's the quick math for CAGR (Compound Annual Growth Rate): use the formula (DPS_end / DPS_start)^(1 / years) - 1. Example (illustrative only): if DPS was $0.90 in FY2020 and $1.60 in FY2025, then CAGR = (1.60 / 0.90)^(1/5) - 1 = ~12.2%. If EPS was $3.00 → $3.60, EPS CAGR = (3.60/3.00)^(1/5) - 1 = ~3.7%.

What this estimate hides: different fiscal year-ends, buybacks that inflate EPS, and one-off accounting items - always inspect the notes.

Compute payout trend and Sustainable Growth Rate for a sanity check

Step 3: calculate payout ratio each year and the trend. Payout ratio = DPS / EPS. Retention ratio = 1 - payout. SGR (Sustainable Growth Rate) = ROE × retention ratio, where ROE is return on equity.

• Use year‑end DPS and diluted EPS to get the latest payout.
• Calculate a 3‑year moving average payout to smooth volatility.
• For ROE, use the same fiscal-year denominator (average equity) as reported in the 10‑K.

Example (illustrative): FY2025 DPS = $1.60, EPS = $3.60 → payout = 44.4%. If ROE = 12%, retention = 55.6%, so SGR = 12% × 55.6% = ~6.7%. Compare DPS CAGR (~12.2%) vs SGR (~6.7%): the dividend grew faster than the firm can sustain from earnings and reinvestment - flag it.

What this estimate hides: ROE volatility, one-time gains boosting EPS, and share repurchases that mask weak operating income. Check cash earnings (operating cash flow - capex) too.

Decision rules and concrete actions

Decision rules you can apply immediately:

• If DPS CAGR > SGR → increase scrutiny (model downside of 25% revenue shock).
• If payout > 70% → prioritize a free cash flow (FCF) check.
• If dividend cover (EPS / DPS) < 2 → treat as structural risk.
• If DPS CAGR > EPS CAGR and payout is rising → escalate to balance-sheet review.
• If SGR < DPS CAGR but FCF covers dividends consistently → acceptable short-term, but watch trend.

Concrete quick checks (do these in your sheet):

• Compute 5‑year DPS CAGR and EPS CAGR side‑by‑side.
• Make a column for annual payout and a 3‑yr avg payout.
• Enter ROE (FY2025) and calculate SGR.
• Run a simple FCF coverage: FCF / dividends for the last 12 months; flag if 1.0.

Quick action plan: Finance: build a 5‑year DPS/EPS sheet and FCF coverage column by Friday; Risk: run a 25% revenue shock scenario if DPS CAGR exceeds SGR. One small typo here and there to keep it human - defintely keep the checks repeatable.

Conclusion

You want a repeatable close-out for dividend-growth work so you can flag overstated payouts and growth. Bottom line: clean the numbers, compute DPS CAGR vs EPS CAGR and SGR, then prioritize cash‑flow checks when payout is high.

Checklist

Start with the situation: you have raw DPS and EPS across fiscal years and need a go/no‑go screen. Do these steps in order and stop when a fatal flag appears.

• Pull DPS and EPS for the window 2021-2025 (or your chosen 1/3/5/10‑yr window).
• Adjust DPS for specials, splits, and M&A; remove nonrecurring dividends.
• Verify shares outstanding and EPS across filings (10‑Ks/10‑Qs) to avoid per‑share mismatches.
• Compute DPS CAGR: (DPS_end / DPS_start)^(1/years) - 1. Example: DPS from $1.20 (FY2021) to $1.80 (FY2025) → CAGR = (1.8/1.2)^(1/4) - 1 ≈ 10.7%.
• Compute EPS CAGR same window and compare to DPS CAGR.
• Compute payout ratio in most recent year: DPS / EPS. Example: DPS $1.80 and EPS $3.00 → payout = 60%.
• Compute sustainable growth rate (SGR): ROE × retention ratio (1 - payout). Use SGR as an upper bound for dividend growth.
• Apply decision triggers: if DPS CAGR > SGR, increase scrutiny; if payout > 70%, prioritize free cash flow check; if dividend cover (EPS / DPS) < 2, treat as a red flag.

One-liner: run the 8 checks and stop on any red flag.

What this estimate hides: share buybacks, one‑time tax effects, and payout funded by debt - recieve those separately before final judgements.

Tools

You need fast, auditable tools so you can repeat the checklist across dozens of names.

• Filings: SEC EDGAR for official DPS/EPS and notes.
• Data feeds: Bloomberg/FactSet for bulk pulls; Yahoo Finance for quick checks.
• Spreadsheet: Excel or Google Sheets with a template for DPS/EPS, CAGR, payout, ROE, and SGR.
• Regression: Excel LINEST or the Data Analysis ToolPak for linear/log fits to smooth noisy DPS series.
• Template features: auto‑adjust for splits, flag special dividends, calculate CAGR, and color rows where payout > 70%.

One-liner: use a single audited spreadsheet with regression support and filings links.

Next step

Deliver a practical output that an analyst or PM can act on immediately. Build a 5‑year sheet, automate the math, and attach the filings evidence.

• Output: 5‑year DPS/EPS table for each stock, DPS CAGR, EPS CAGR, payout trend, ROE, SGR, and flags for DPS CAGR > SGR and payout > 60%.
• Acceptance criteria: formulas visible, links to the source 10‑Ks, and a cash‑flow note when payout > 60%.
• Quick review: sample of 10 names checked and flagged list created.

One-liner: build, audit, and flag - then escalate the flagged list.

Owner: You (Analyst) - build the 5‑year DPS/EPS sheet and flag stocks where DPS CAGR exceeds SGR and payout > 60% by Friday, December 5, 2025.