As a dividend investor you will definitely find the latest Dividend Growth ratios added to the Quant Investing screener valuable.
Three to ten years dividend growth
You can now screen for investment ideas using dividend growth over the past three, five, eight and ten years.
The ratio gives you the geometric average dividend growth rate over the period as a percentage, for example 3.3%.
Why the geometric mean
We use the geometric mean because it penalises declined in the dividend much more than the arithmetic mean does.
How is it calculated?
The geometric average gives you the dividend growth over the period by using the product of the values (as opposed to the arithmetic average which uses their sum).
The geometric average is defined as the nth root of the product of n numbers.
For example, suppose a company paid the following dividends:
Year 1 = 1.0
Year 2 = 1.1
Year 3 = 0.9
Year 4 = 1.3
This means the company had dividend growth of 10% the first year, -18.2% the second year, and +33.3% the third year.
What is the average?
It is not the arithmetic mean of 8.4%, because what these numbers mean is that in the first year the dividend was multiplied (not added to) by 1.10, in the second year it was multiplied by 0.82, and the third year it was multiplied by 1.33. The relevant quantity is the geometric mean of these three numbers which is 6.3%.
