Dividend Yield vs Dividend Growth: Which Matters More for Long-Term Investors?

Key Takeaways

1. Dividend yield shows how much a company pays in dividends compared to its current share price.
2. Dividend growth shows how much a company’s dividend per share has increased over the years.
3. A high dividend yield may result from a falling share price and may signal that the company could reduce its dividend. 
4. Over time, the growth in dividends can increase the income you receive from your initial investment, but future dividend increases are not guaranteed.
5. The choice between the two depends on whether you need regular income now or are building income for the future through dividend stocks.

Many investors look at dividend stocks when comparing two companies. Two figures that often come up in this comparison are dividend yield and dividend growth.

A stock with a 6% yield may appear more attractive than one with a 2% yield. However, the stock with the lower yield may have a history of increasing its dividend, while the higher-yield stock may have kept its dividend unchanged for several years.

This blog explains  what each measure tells you and how a long-term investor can consider both when evaluating dividend stocks.

What Is Dividend Yield?

Dividend yield is the annual dividend per share (usually based on the last twelve months)

divided by the current share price, shown as a percentage.

For example, if a company pays Rs. 10 per share in a year and its share price is Rs. 200, the dividend yield is 5%.

Because the share price is part of the formula, the yield changes every day. If the price falls and the dividend stays the same, the yield rises. If the price rises, the yield falls.

What Is Dividend Growth?

Dividend growth is the rate at which a company increases its dividend per share over time. It is usually measured overexpressed as a compound annual growth rate (CAGR) over

three, five or ten years.

A company that paid ₹5 per share in annual dividends five years ago and pays ₹8 today has increased its dividend over that period at a compound annual growth rate of about 9.9%. This may reflect changes in its profits, cash flows and dividend policy.

Dividend Yield vs Dividend Growth: The Core Difference

The dividend yield indicates the annual dividend related to the current share price. Dividend growth shows how the dividend per share has changed over time, but it does not by itself show how it will change in the future.

Here's a simple way to compare the two:

How Time Changes the Picture

Let's take an illustrative example. You invest Rs. 1,00,000 each in two dividend stocks.

• Stock A has an initial annual dividend yield of 6%, and its dividend grows 2% a year.
• Stock B has an initial annual dividend yield of 2%, and its dividend grows 12% a year.

Assuming these growth rates continue, and that the first-year dividends are ₹6000 and ₹2000 respectively, Stock A would pay about ₹7,171 in annual dividends in year 10, while Stock B would pay about ₹5,550. In year 15, Stock A would pay about ₹7,917 annually, while Stock B would pay about ₹9,774. Stock B's dividend overtakes Stock A's in year 13

This is a pure illustration and does not take into account share prices and taxation. This is neither a forecast nor a guarantee. Actual dividends may differ.

Common Doubts About Dividend Yield and Dividend Growth

Is a high dividend yield always a good sign?

Not always. A very high dividend yield can appear when a share price drops sharply because of business problems. If earnings keep falling, the company may reduce or stop its dividend.

Does dividend growth mean the share price will also rise?

There is no such certainty. Rising dividends often come from rising profits, which can support the share price, but prices also move with market conditions, valuations and sentiment.

What is the payout ratio, and why does it matter?

The payout ratio is the proportion of a company's earnings paid out as dividends. A high payout ratio may leave the company with less money to reinvest in its business or increase dividends. Whether the payout is sustainable depends on the company's earnings, cash flows and financial position.

Should I pick only one approach?

You do not have to focus on only one measure. You can compare both dividend yield and dividend growth when evaluating dividend stocks, based on your income needs, time horizon and risk tolerance.

How mastertrust Helps You Invest in Dividend Stocks

mastertrust offers a trading and demat account on mastertrust.co.in that you can use to invest in dividend stocks. You can track holdings and dividends credited to your accountYou can track your holdings on the platform and check dividend credits in your bank account.

You can also explore other topics related to stock investing, such as SLBM vs dividend income. You can also see how inflation impacts long-term investment planning.

Final Thoughts

Dividend yield Yield and dividend growth provide different information. Dividend yield shows the annual dividend relative to the current share price, while dividend growth shows how dividend payments have changed over time though it does not guarantee how they will change in the future.

If you need income now, yield may carry more weight. If you have many years ahead, dividend growth may matter more. In both cases, the company's earnings and payout ratio deserve a close look.

Frequently Asked Questions (FAQ)

1. How is dividend yield calculated?

Take the yearly dividend for each stock and divide it by its market price and then multiply the result by 100. So, a dividend of Rs. 10 on a stock priced at Rs. 200 will give a dividend yield of 5%.

2. Why does dividend yield change every day?

The yield depends on the share price, which changes during market hours. The dividend itself usually changes only when the company announces a new payout.

3. Are dividend stocks suitable for beginners?

They can be, as long as you check the company's earnings, debt and payout history. Dividends are not guaranteed, and companies can reduce them.

4. Is dividend income taxable in India?

Yes. Dividend income is generally taxable at the applicable income tax rate, and the company may deduct tax at source (TDS) when paying it, subject to the rules that apply to the investor.

5. Which is more important for retirement income?

It depends on your timeline. A higher dividend yield may help if you need income soon, while dividend growth may help if retirement is many years away.

6. Can I track dividends received through mastertrust?

You can check your holdings and available account details through the mastertrust platform. Dividends are generally credited to the bank account linked to your demat account, subject to the company's payment process and your account records.

To receive a dividend, you must hold the shares on the record date. You can verify the credit in your bank statement.

Investments in the securities market are subject to market risks. Read all related documents carefully before investing. This blog is for educational purposes only and is not investment advice or a recommendation to buy or sell any security.