Last week I read a number of articles about dividend growth rate. One of these articles was a good article from Dividend Engineering (click here) about three methods to calculate the average dividend growth rate (DGR) of a stock. He concluded:
After reviewing all three methods, I believe that the best method is the Compound Rate Method. The main reason is that this is how dividend typically grows.
However, there are two things to keep in mind when using this method.
First, it is very sensitive to the annual dividends at the beginning and at the end of the period of reference. Abnormal annual dividend either at the beginning or at the end could skew the result.
Second, this method totally ignores what happened during the intervening years. Valuable insights could therefore be lost if you don’t look at the full data set. So in the end, whatever method you use, always check the raw data.
I agree with the Dividend Engineer that the best method is the Compound Rate Method. This is also the method used by Dave Fish in his monthly Dividend Champions spreadsheet. After reading all these articles I asked myself ‘What is my portfolio’s weighted average dividend growth rate?’
Dividend stocks can be found in all sorts. There is high dividend yield/low annual growth class; you have average yield/average growth class; and low dividend yield, high annual dividend growth class. Which one do I prefer, you ask? Well you have to wait for a future article. For now I want to calculate my weighted average dividend growth rate on my Vrijheid Fonds.
For all my individual stocks I calculated the 3-year DGR. I use the 3-year DGR, because I think this give the most realistic long-term rate. And therefore it is a good indicator for future performances. Of course I look at the full data set of all my stocks to see if there are irregularities. For that reason I dropped the DGR for ARCP in my calculations.
My weighted average dividend growth rate on my Vrijheid Fonds came to 6.92%.
And Okay now I know this. Great, and now what can I do with it?
Lanny of the Dividend Diplomats had a nice article about it (click here). I will us the same method for answering this question.
As I mentioned my weighted average dividend growth rate on my Vrijheid Fonds is 6.92%. And, my weighted dividend Yield on my Vrijheid Fonds is 3.66%. If we add these two metrics together, we can use this number to calculate how much my income could essentially grow without doing anything. 😉 Of course this new metric can be used as an expectation.
For 2015 I have a projected income for my Vrijheid Fonds of € 1,600. This means that approx. € 169 will be added this year, just by doing nothing. That sounds good!
What a great way of looking at my portfolio. Imagine what the numbers will be if you do this for more than 20 years. So this shows again that buying stocks earlier in your life (and consistently keep adding stock each year) the 8th wonder of the world (compound interest) has a giant impact on the value of your portfolio.
If my Vrijheid Fonds can keep these numbers for a number of years, I can expect a growth of around 10% each year without doing a thing. Wow! This brings me closer to the destination of my journey. That is a nice thought just before bedtime 😉
What do you think about this way I looked at my portfolio? Have you calculated yours?
Please comment; I am looking forward to it.