What is 'Incremental Dividend'

An incremental dividend is a series of repeated increases in the dividend a company pays on its common shares. Larger companies with significant cash flow tend to pay incremental dividends as a way to return value to shareholders, and also to flaunt a company’s strong balance sheet to market participants.

Sometimes, corporate management teams communicate their plans to pay incremental dividends to help attract income-seeking investors. Other times, management teams won’t communicate an incremental dividend explicitly, but investors pick up on the pattern of rising dividends over a certain period of time.

BREAKING DOWN 'Incremental Dividend'

An incremental dividend generally is paid only by more mature companies, and firms with low dividend payout ratios, that have the ability to easily increase this ratio over time. Shareholders tend to watch this ratio closely, as it helps to indicate a company’s ability to boost dividends in the future.

Incremental dividends generally are seen positively by the markets. However, there are times when a company’s revenue is either not growing or shrinking, and a company continues to pay incremental dividends. In these situations, shareholders worry that profits won’t be sustainable over time, and neither will the incremental dividend.

Note that many firms pay dividends to shareholders in cash, although some pay in additional shares of stock. The former is generally seen more favorably by investors.

The reason is, stock dividends increase a company’s shares outstanding, and, by doing so, they dilute the value of the shares an investor already holds.

For example, say a company with 2 million shares outstanding declares a cash dividend of $0.50. An investor holding 100 shares, therefore, receives $100. Instead of pocketing that dividend, most investors tend to reinvest it by buying additional shares. Reinvesting dividends typically adds meaningfully to gains an investor might receive just from price appreciation over the long term.

However, say the same investor receives a 5% stock dividend. This means the investor receives 50 additional shares. However, to offer this dividend, the company increases its shares outstanding by 200,000 shares. Because the company now has more shares out and they are backed by the same company assets, the value of the existing shares in circulation decreases.

When an Incremental Dividend Ends

When a company that pays incremental dividends stops paying them, even once, it’s sometimes very negative for the stock price. The reason is, companies that pay incremental dividends tend to attract a high percentage of income-seeking investors. When it’s unclear to these investors when the stock will pay its next dividend, many tend to move on to other stocks that do pay predictable, incremental dividends.

  1. Property Dividend

    A property dividend is an alternative to cash or stock dividends. ...
  2. Special Dividend

    A special dividend is a non-recurring distribution of company ...
  3. Dividend Frequency

    Dividend frequency is how often a dividend is paid by an individual ...
  4. Stock Dividend

    A stock dividend, also known as a scrip dividend, is a dividend ...
  5. Cash-and-Stock Dividend

    A cash-and-stock dividend contains a portion of cash and a portion ...
  6. Accumulated Dividend

    An accumulated dividend is a dividend on a share of cumulative ...
Related Articles
  1. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  2. Investing

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  3. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  4. Financial Advisor

    How mutual funds pay dividends: An overview

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  5. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
  6. Investing

    The Best 8 Funds For Regular Dividend Income

    Here's a list of the top mutual funds which pay regular dividends, for frequent income.
  7. Investing

    Dividends Still Look Good After All These Years

    Find out how this "first love" still holds its bloom as it ages.
  8. Investing

    3 Dividend Trends in the S&P 500 Index (TSN, LUV)

    Analyzing recent financial performance of companies demonstrating an inclination to issue consistent dividends to shareholders on a quarterly basis.
  1. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
  2. Does the S&P 500 index include dividends?

    Learn about dividend payments and the S&P 500 index. Find out the reasons to why the yield has trended lower over time due ... Read Answer >>
  3. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
Trading Center