Dividend Compound Annual Growth Rate (CAGR)

Dividend Compound Annual Growth Rate (CAGR) measures the annualized growth rate of a company’s dividend over a specified period. Unlike simple percentage growth, CAGR accounts for compounding, providing a smoothed rate that reflects how dividends have grown year over year as if they had grown at a constant rate. It is a crucial metric for income-focused investors in the Philippines seeking companies with consistent dividend growth.

In practice, Dividend CAGR answers the question:

“If a company’s dividends grew steadily over X years, what would the average annual growth rate be?”

For example, if a stock paid ₱1.00 per share in dividends five years ago and ₱1.50 per share today, the Dividend CAGR captures the average annual growth across those five years, smoothing out year-to-year fluctuations.

How Dividend CAGR Is Calculated

The standard formula for Dividend CAGR is:

CAGR (%) = ((Ending Dividend / Beginning Dividend) ^ (1 / n)) - 1

Where:

• Ending Dividend = dividend per share in the most recent year
• Beginning Dividend = dividend per share at the start of the period
• n = number of years in the period

Example (Philippine Stock):
A PSE-listed company paid the following annual dividends:

To compute the 5-year Dividend CAGR:

CAGR = ((1.65 / 1.20) ^ (1 / 4)) - 1

Step-by-step:

1. Divide ending by beginning: 1.65 ÷ 1.20 = 1.375
2. Take the fourth root (since n = 4 intervals between 5 years): 1.375 ^ 0.25 ≈ 1.082
3. Subtract 1: 1.082 - 1 = 0.082

Result: 8.2% Dividend CAGR per year over the 5-year period.

This means dividends grew, on average, about 8.2% per year over the five years, assuming compounding.

Common Dividend CAGR Periods in the Philippine Market

Philippine investors and analysts typically compute Dividend CAGR over multiple standard periods, depending on the investment horizon and data availability:

• 3-Year Dividend CAGR – Short-term growth, useful for evaluating recent dividend performance
• 5-Year Dividend CAGR – Medium-term growth, common for blue-chip stocks and REITs
• 10-Year Dividend CAGR – Long-term trend, preferred for assessing sustainable dividend growth for income portfolios
• Since IPO or Listing CAGR – For companies with sufficient dividend history, providing insight into lifetime performance

The choice of period affects interpretation: shorter periods may show volatility from temporary cuts or increases, while longer periods smooth fluctuations and reflect long-term consistency.

Philippine Market Context and Practical Use

In the Philippines, Dividend CAGR is particularly relevant for:

• Blue-chip and REIT investors – These companies often declare regular cash dividends, and CAGR helps gauge reliability and growth trends
• Retirement and income planning – Predictable dividend growth contributes to compounding income over time
• Screening and ranking stocks – Investors may compare Dividend CAGR across sectors to identify consistent payers or high-growth income stocks

It is important to consider both absolute DPS and CAGR together. A stock with a high CAGR but very low initial dividends may still generate modest income. Conversely, a high DPS with a low CAGR may provide stable income but little growth potential.

Dividend CAGR complements other metrics, such as payout ratio and earnings growth, ensuring that dividend increases are sustainable and supported by corporate performance.

Example: Comparing Dividend CAGR Across Companies

Interpretation:

• Company A shows steady, medium growth with solid dividends
• Company B grows slower but already pays higher absolute dividends
• Company C shows high growth, but total income is still relatively small

This highlights how Dividend CAGR must be contextualized alongside DPS, yield, and company fundamentals for meaningful decisions.

Investor Considerations and Limitations

• Dividend CAGR assumes steady compounding, which may not reflect volatile dividend policies in some Philippine companies.
• Short-term anomalies (one-time special dividends or cuts) can distort growth rates.
• CAGR does not account for taxation, which in the Philippines is 10% final withholding on cash dividends, so net growth may be slightly lower.
• Investors should combine Dividend CAGR analysis with financial health indicators and payout sustainability to avoid overestimating future income.

Common Questions About Dividend CAGR

1. Is a high Dividend CAGR always good?
   Not necessarily. A high CAGR may be due to a low starting dividend or one-time increases and may not reflect long-term sustainability.
2. How does Dividend CAGR differ from simple dividend growth?
   CAGR accounts for compounding and smooths annual growth, while simple growth only measures percentage increase over the period.
3. What period should I use for Dividend CAGR?
   It depends on your investment horizon: 3-year for short-term trends, 5-year for medium-term, 10-year for long-term, or since IPO for lifetime performance.
4. Does Dividend CAGR guarantee future dividends?
   No. CAGR is historical and does not guarantee future payouts; company performance and policies may change.
5. Can taxation affect CAGR?
   Yes. In the Philippines, cash dividends are subject to a 10% final withholding tax, so net growth may be slightly lower than gross CAGR.

Summary

Dividend Compound Annual Growth Rate (CAGR) is a critical metric for Philippine investors seeking consistent income growth. It provides a clear, numerical view of dividend growth over time, smoothing year-to-year variations into a single average annual growth rate. By examining multiple periods—3-year, 5-year, 10-year, or since IPO—investors can evaluate both short- and long-term trends, identify reliable income stocks, and make informed decisions for portfolio planning.