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. Dividend Rate

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 strong cash flows. Companies that are growing rapidly typically reinvest any cash generated back into the business, and they do not pay out any dividends to shareholders. Cash-intensive businesses that produce consumer staples and that provide healthcare, for example, typically spend less to grow their companies; therefore, they are more likely to 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 is calculated as the dividend rate divided by earnings per share (EPS) over a 12-month period. Lower payout ratios are preferable because less of a company's net income will be disbursed as dividend payments. These dividends are more sustainable. Conversely, companies with high payout ratios may have difficulty maintaining dividend payments.

Dividend Aristocrats

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 and one with a competitive advantage. Dividend aristocrats typically come from sectors that experience steady demand in different economic environments. Companies engaged in consumer staples, industrials and health care are the most likely to grow dividend rates continuously. According to Sure Dividend, as of May 2018, there were 53 S&P 500 Dividend Aristocrat companies.

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