Retention Rate Is Important Factor For Dividend Growth Companies

Investing in a company that simply increases it dividend will not ensure an investor that the investment will yield higher returns. One factor to evaluate is the earnings retention rate. Retention rate is the amount of earnings left over after accounting for the dividends paid to shareholders. If a company pays all earnings to shareholders, then the earnings retention would be zero. If a company pays out 70% of its earnings to shareholders, then the company's retention rate would equal 30%.

The table below shows the average retention and dividend growth rates over the past ten and five years for a number of companies we have recommended. As can be seen, since 1999 these companies, as a group, had an average retention rate of 17%, or more than four times the average of the S&P 500 for the same period. Their average dividend growth rates for the past five years were also far superior to the S&P 500 -- even taking into account the three companies in the group not paying dividends for the entire period.



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