Dividend Yield vs Dividend Growth - Is the math correct?

Hi,

I’ve only been investing for a few years and still consider myself quite the novice. I mainly invest in higher yield stocks with consistent dividend payouts that show sustainability. However, recently I’ve been looking into dividend growth with the aim of bolstering my portfolio in that direction. I’ve tried to find articles/information that compares the performance of the two from a mathematical perspective but couldn’t find much. It mainly consisted of ‘do A if you’re young or do B if you’re retiring/retired.’ So, I had a go at doing the comparison in the table below:
image

The formula I used in the Stock 1 column was: “=Initial_Investment*(1+(Stock1_DY*(1+Stock1_DGR)[1]))[2]

In this example Stock1_DY relates to cell B3 and Stock1_DGR relates to cell B4.

If anyone is able to check the math on this and confirm my findings it would be greatly appreciated.

Many thanks.


  1. @Year ↩︎

  2. @Year ↩︎

Welcome to the community

Sorry I tend to start from scratch with problems but hopefully the following comments are useful. I’m not sure that your formula correctly displays because T212 is trying to interpret the year bits

I wouldn’t calculate it this way. If you are assuming that the dividend grows at a steady rate (but assumption which I’ll comment on in a minute) then the dividend in year “n” will be D*(1+G)^n (ie the growth in the dividend is (1+G)^n where G is your assumed % growth and D is the initial rate of dividends.

For simplicity I would insert a line between your existing row 5 and 6 and have the initial investment copied to that row (ie A6 =0 ie year 0 and B6 is “=$B$1”). That way you can have the same formula in all subsequent rows.

B7 = B6*(1+$B3)*(1+$B4)^A7

You should be able to drag copy that formula to all of the lower cells in B and drag copy to C and D (because of the $).

I am not sure what you are trying to analyse. I’m not sure you can really assume dividend growth rates and the normal reference to growth is to the company’s market cap ie the share price. Thus the debate of whether it is better to have a share that increases in value (share price) or one that stays at a roughly constant share price but you get a dividend. I would be surprised if you could assume a 10%pa growth in dividends because this would (I would have thought) be predicated on a pretty exceptional growth in the company itself which would be strongly reflected in the share price. Thus I think you are essentially comparing apples and oranges. Column B is a highly cash generative company that distributes that cash via a big dividend but may have little underlying growth whereas column C is a company generating profits and it pays a modest dividend but is growing very strongly which is reflected in the profits and thus a strong underlying increase in dividends but it’s share price would have probably risen very strongly

If you are trying to compare a company that has strong growth with a stable company that pays a high dividend what I suspect you’ll need to do is calculate the dividend and share price in each year and you can then calculate either cumulative dividends and final value (ie where you took the dividends as income or to invest elsewhere) or calculate it with dividends reinvested which will just give a final value

Thanks for your feedback!

I’ll work through your comments the best I can.

That’s correct regarding the formula I pasted, the “Year” in the formula points to the adjacent row in the “Year” column. “Year” in B6’s formula = 1 for example. I wasn’t sure how to get the pasted formula to display correctly.

Regarding paragraph 2 “the dividend in year “n” will be D*(1+G)^n (ie the growth in the dividend is (1+G)^n where G is your assumed % growth and D is the initial rate of dividends.”, could you tell me how this is different to what I have? “=Initial_Investment*(1+(Stock1_DY(1+Stock1_DGR)[1]*))[2]”.

I did try your formula but got wildly different results:
image
From what I can see the formula is multiplying the initial investment by 1+D, and then multiplying that result rather than just D by 1+G. For example, 1000 x (1+10%) = 1100. Then, 1100 x (1+1%) = 1111. The dividend growth rate should only be increasing the dividend (dividend yield when excluding any changes in share price).

I’ve structure my formula with named cells within a calculated column. So, rather than use “$B$1”, I’ve specified “Initial_Investment” within the formula will always point to cell B1. The same with Stock1_DY pointing to cell B3 and Stock1_DGR pointing to cell B4.

The purpose of my table is to try to look at performances of stocks based on dividend performance independent of share price appreciation. I came across an article that made me question my own investing strategy. This is my attempt at evidencing a comparison between Dividend Yield vs Dividend Growth. However, I didn’t want to go too far down the rabbit hole without being sure my math and the subsequent outcomes were correct.


  1. @Year ↩︎

  2. @Year ↩︎

I deliberately put the growth rate on the capital and dividend just to see if people were awake :slight_smile:

Yes growth should be applied only to the dividend element - you seem to have that worked out.

I didn’t compare it to your equation because T212 was trying to format your comment (did you include @ or some other special character) so I couldn’t read it easily.

I had no idea what level of knowledge you had regarding excel so didn’t know whether you understand named cells etc and I just felt it was easiest to use the old syntax of $[column][row]… If you use named cells that’s obviously great.

I can’t see the article because I don’t pay for seekingalpha. Fundamentally I don’t see how you can do an analysis without considering what share price will also do

Can you give a summary of the article’s gist?

I have free access to the article. I probably "registered " with Seeking Alpha at some time, so a cookie may be set.

Basically they’re looking at what you intentionally got misunderestifuddled. The matter of picking a stock for its dividend /divident growth in isolation, or whether you pay attention to the stock price too. As you say, surely you have to do both.

I’ve never quite got it with dividends
Persimmon - 15.8% divi - great - oh but the stock is down 33% on the year.
So you’d have been better off shorting the stock?
Rio T too?
What am I missing?
(Other than a way to reduce your liability to CGT and use your divi tax allowance).

Haha, thanks for look out for me.

Yeah the “at” symbol in table forces the formula to look at a cell in the same row within range. For example, [Year] would point to the whole Year column, ["at"Year] would point to the relative cell within the Year column.

I could see the article without logging into SA. But to summarise it talks about:
High-growth dividend stocks:
The article provides criteria for selecting dividend stocks that have a high rate of dividend growth rather than a high current yield. It also offers a step-by-step guide on how to structure a portfolio based on this strategy.

Selection criteria and process:
The article uses various factors such as dividend growth history, payout ratio, EPS growth, Chowder number, debt ratios, credit ratings, and sales growth to filter out and rate nearly 400 dividend stocks. It then selects the top 10 stocks for the month of August 2023 based on a subjective analysis.

Past performance and comparison:
The article shows how the model portfolio of the selected 10 stocks would have performed since 2007 compared to the benchmark fund VIG or the S&P 500. It also reports the performance of the previous month’s selections and the YTD cumulative figures.

Having re-read your earlier posts with fresh eyes I understand (I hope) what you mean now with regards to why the share price can’t be factored out of the equation. If a company has a high dividend growth rate then the share price would increase in line with this and so the purchasing power of reinvested dividends would be decreased. Please let me know if I’ve still misunderstood.

Thanks for the summary. I’ve now managed to see the article but not had time to read it. However, I notice that they’ve got MSFT in the list.

I think that it sounds like an interesting issue to consider (current dividend rate v potential growth in dividends) but I my first react was that the primary issue is company/market cap growth rather than being a dividend issue. Essentially if there is dividend growth in the future my initial thought was that it would generally be the result in significant growth in the company and the company’s market cap. Thus it would come down to identifying good growth companies and not be about dividends.

The fact that Microsoft features in the final short list only reinforces my thoughts. Microsoft pays a pretty small dividend and I haven’t researched info about their future dividend plans but my expectation would be that Microsoft would continue to pay modest dividends and wouldn’t start paying LGEN or BHP levels of dividend. If the dividend increases in $ value it is because of the growth in the company and market cap and not because the dividend rate as a percentage increases. I could be complete wrong on this and I could be missing something (I haven’t researched dividends for these companies). Thus if I am missing something then I’d be interested that there is an issue I need to research. However, if I’m not missing something then this seems to be the perennial debate/issue about companies paying high dividends but often having little growth (in terms of share price - ie they are just giving shareholders the generated free cash rather than using it to fund future growth in the company) versus growth companies that often pay little or no dividend but use free cash to invest in future growth.

The response I often get is - “what about pharma Cos they pay good dividends and have good growth”. For me the issue remains that paying a high dividend either reflects low growth or reduces what growth might be. Even if a company, such as a pharma company, can or does pay a good dividend, the question for me is what would the growth have been if they invested the money into the company to generate future growth. A pharma company could fund more drug development or acquisitions… Thus high dividends don’t generally excite me not least because the share price is often hit every time a dividend is paid (I often look to see whether it is better to sell immediately before the exD day and buy back on or after ExD.

Interesting, companies such as Microsoft that pay fairly small/negligible dividends means the share price often ignores the dividend on ExD days.

Anyway, not having read the article yet I am highly sceptical about it given that they appear to have selected companies that I’m sceptical will significantly increase dividend rates but they are growth companies (in market cap terms).

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