What is the 'Dividend Rate'
The dividend rate is the total amount of the expected dividend payments from an investment, fund or portfolio expressed on an annualized basis plus any additional non-recurring dividends that may be received during that period. Depending on the company's preferences and strategy, the dividend rate can be fixed or adjustable.
BREAKING DOWN 'Dividend Rate'The dividend rate of an investment, fund or portfolio is calculated by multiplying the most recent periodic dividend payments by the number of periods in one year. For example, if a fund of investments pays a dividend of 50 cents on a quarterly basis and pays an extra dividend of 12 cents per share because of a non-recurring event from which the company benefited, the dividend rate is $2.12 ($0.50 x 4 + $0.12) per year.
Dividends are generally paid out by companies that generate stronger cash flows. Companies that are growing rapidly typically reinvest any cash generated back into the business, and they don't pay out any dividends to shareholders. Cash-intensive businesses like consumer staples and utilities don't usually need to spend a lot investing in growing their companies, so they can distribute a percentage of income to shareholders as dividends.
Dividend Payout Ratio
Companies that pay dividends often prefer to maintain or slowly grow their dividend rates as a demonstration of stability and as a means of rewarding shareholders. Companies that cut their dividends may be entering a financially weaker state that, in many cases, is accompanied by a drop in the stock price.
The dividend payout ratio is one way to assess the strength of a company's dividend. It's calculated as the dividend rate dividend by earnings per share (EPS) over a 12-month time period. Lower payout ratios are preferable, since it means less of a company's net income is going towards dividend payments. These dividends are generally considered to be more sustainable. Conversely, companies with high payout ratios may have more trouble maintaining dividend payments.
Income-seeking investors often look to companies with long histories of steadily growing dividend payments. A dividend aristocrat is a company that has raised its dividend for at least 25 straight years.
Dividend aristocrats typically come from sectors that experience steady demand in different economic environments. Companies engaged in utility services, consumer goods and food production are the most likely to have the means to grow dividend rates continuously. As of May 31, 2016, a total of 108 companies meet the dividend aristocrat definition. American States Water Company (NYSE: AWR) is the longest-tenured dividend aristocrat, with 61 consecutive years of increased dividends.