Dividend Yield vs. Dividend Growth

Quick Definition: Dividend yield is the annual dividend payment divided by stock price, while dividend growth is the rate a company increases its dividend over time.

Back when I was touring with my band in the 90s, we had to make a choice between immediate payouts (getting paid after each gig) or holding back and saving for marketing costs for the next shows that would pay off later. Dividend investing presents a similar choice: do you want cash in your pocket now, or are you willing to wait for bigger payouts down the road?

The Dividend Dilemma Every Investor Faces

When I started focusing on dividends in 2012, I quickly realized there's a fundamental choice we all face: chase high yields for immediate cash flow or prioritize dividend growth for future wealth. It's like choosing between a decent-paying gig tonight versus building an audience that pays more over time.

Both strategies have their place, but understanding the differences is crucial to matching an investment approach with financial goals. Let's break it down.

Why Dividend Yield and Growth Matter More Than You Might Think

Dividends provide stability when markets go crazy – something I've witnessed repeatedly since my first trading days in 1995. But here's what most people don't realize: not all dividend stocks are created equal.

Dividend Yield: This measures the annual dividend as a percentage of the stock's current price. For example, if a stock pays $2 per year and costs $100, that's a 2% yield.

Dividend Growth: This tracks how much a company increases its dividend payment year after year. A company boosting its dividend from $1 to $1.05 has a 5% growth rate.

The choice depends on what an investor may need most: income today, growth for tomorrow, or a mix of both. Let’s walk through each approach.

Dividend Yield: Getting Paid Today

What It Actually Is

As I’ve indicated, dividend yield is calculated using this simple formula:

Annual Dividend Per Share
÷ Stock Price
= Yield (%)

For example, if a company pays $4 per share annually and the stock costs $80, that's a 5% yield ($4 ÷ $80). Pretty straightforward.

Try it yourself...

You can find more helpful calculators on our Calculators for Dividend Investors page.

The Benefits

• Immediate Cash Flow

  High-yield stocks (typically 4–8%) can provide steady income, perfect if perfect for investors that need money now. I've used these cash flows to reinvest and grow my portfolio over time while pulling some cash here and there for unexpected expenses.

• Stability

  Companies with high yields, like utilities, tend to have stable earnings. Think of them as the rhythm section of a portfolio – not flashy, but they keep everything steady.

• Compounding Power

  When reinvesting dividends through DRIPs (Dividend Reinvestment Plans), that's essentially getting compound interest on steroids. I've watched small positions grow substantially through reinvestment.

The Risks

• Yield Traps

  An unusually high yield can be a warning sign. If a stock yields 12% when others in the sector yield 4%, something's probably wrong.

• Limited Growth

  High-yield companies often pay out most of their profits rather than reinvesting in growth.

• Interest Rate Sensitivity

  When interest rates rise, high-yield stocks can lose their appeal as bonds start offering competitive returns. I've seen this cycle play out multiple times since the 90s.

Real-World Example

Imagine an investor buys 100 shares of a utility stock at $50 per share that pays $3 annually (6% yield). They'd earn $300 per year – money they could use for bills or reinvest.

But investors have to be careful. If that stock price drops to $40, the yield rises to 7.5%, which might seem great, but their portfolio value has dropped. This happened to me with a few ETFs during market corrections, and it taught me to look beyond just the yield percentage.

Dividend Growth: Building Wealth Over Time

What It Actually Is

Dividend growth simply measures how fast a company increases its payouts year over year. A company that raises its dividend from $1 to $1.10 has a 10% growth rate.

The Benefits

• Inflation-Beating Income

  Growing dividends typically outpace inflation, increasing real income over time.

• Strong Fundamentals

  Companies that increase dividends for decades (like Dividend Aristocrats with 25+ years of increases) typically have rock-solid fundamentals.

• Price Appreciation

  Dividend growth stocks often see their share prices increase too, boosting total returns.

The Risks

• Lower Initial Yield

  Growth stocks typically yield only 1–3% to start, offering less immediate income. This requires patience.

• Market Volatility

  Growth-oriented companies can experience more price swings, especially in sectors like technology or consumer goods. It's not for the faint of heart.

• Potential Dividend Cuts

  During economic downturns, even strong companies might pause dividend growth, though truly established firms rarely cut dividends outright.

Real-World Example

Let's say an investor buys 100 shares of a consumer goods stock at $100, paying $2 annually (2% yield) but growing at 6% per year. In ten years, that dividend could reach approximately $3.58 per share, giving that investor a 3.58% yield on their original cost – plus any stock price gains.

Comparing Yield vs. Growth: Making the Right Choice

Data is subject to change and not guaranteed. Consult a professional before making decisions. Data sourced from industry-standard sources, as of May 2025.

Please keep in mind that I'm not a professional or licensed financial advisor and this is not financial advice. I create all of my articles based on my personal experience and research. Check out our full disclaimer(s).

Choosing a Dividend Strategy

For Immediate Income Seekers

• Who This Could Be For: Retirees or anyone needing cash flow now
• Strategy Possibility: Prioritize stable high-yield stocks or ETFs with 4–6% yields and proven payment histories
• Platform Options: Brokerages like Robinhood, eToro, Schwab, Vanguard, or M1 Finance make dividend investing straightforward

This may work well for people in their 50s-60s who need income to supplement retirement or reduce work hours. The key is finding sustainable yields rather than chasing the highest percentages.

For Long-Term Wealth Builders

• Who This Could Be For: Younger investors with 10+ years until they need the income
• Strategy Possibility: Focus on companies with consistent 5–10% annual dividend increases
• Application: Use platforms like M1 Finance or Robinhood to automatically reinvest dividends through DRIPs

A 20-something professional might start with just $50 monthly contributions to dividend growth stocks, but over decades, this can transform into substantial income.

For the Balanced Approach (My Preference)

• Who This Could Be For: Mid-career investors wanting both income and growth
• Strategy Possibility: Allocate a portfolio between high-yield and growth investments
• Setup: 50% in steady 4-5% yielders for current income, 50% in 1-3% yielders with 7-10% growth rates for future income

This balanced approach has worked best for me personally. Like arranging instruments in a song, you need both rhythm and melody to create something complete.

A Real-World Investor Scenario

How this might work in practice...

Imagine a 35-year-old with a $30,000 portfolio who wants to build passive income for an early retirement at 55. They might split their investments:

• $15,000 in a high-yield ETF yielding 4.5% ($675/year initially)
• $15,000 in dividend growth stocks averaging 2% yield but 8% annual growth

In year one, they'd earn about $975 in dividends. But by year 20, assuming reinvestment, their annual dividend income could exceed $4,000 – without adding any new capital.

I've tracked similar scenarios in my own spreadsheets over the years, and the compound growth can be remarkable when you stay consistent and reinvest.

Interesting fact: The “Yield King”

Here’s a fun historical fact: The Dutch East India Company (VOC)—widely considered the world’s first publicly traded company—paid dividends for nearly 200 years, including in spices like nutmeg and pepper. But here’s the kicker: Some European government bonds from the 17th century still technically pay interest today.

(You can read more about The Dutch East India Company in my article “The History of Dividends”)

One such example is a perpetual bond issued by the Dutch Water Board in 1648 that pays an annual interest of 2.5%. Incredibly, Yale University still collects on it— years later!

This longevity highlights the power of consistent income, even when the form (or flavor) of dividends gets a little… exotic. While you won’t find spice dividends on modern stock exchanges, the idea of compounding, long-term income is as old as investing itself.

FAQs

The Roundup

Whether you're a 25-year-old barista just starting with $25 weekly investments, a 45-year-old nurse with a $50,000 portfolio, or a 60-year-old looking to maximize retirement income, understanding the yield-growth tradeoff is crucial.

Like learning guitar or coding, dividend investing historically takes time to master and that’s why I created Everdend: to hopefully help speed things up for investors. I've made plenty of mistakes along the way since my first trades in 1995 that current investors hopefully don’t have to. The consistent cash flow from dividends has been worth the learning curve.

Start small if needed – even fractional shares through eToro or Robinhood can get you in the game – but start building those dividend streams today. Your future self will thank you.

Remember, it's not about getting rich quick – it's about building reliable income streams that grow over time. The best dividend strategies are built on patience, consistency, and a clear understanding of what you're trying to achieve.