The grower wins in year thirteen and is still behind on cash in year nineteen
$10,000 at 7% growing 2%, against $10,000 at 3% growing 10%. The annual payment crosses in year thirteen. Total cash received does not cross until year twenty. Which side is right depends on a date, not a philosophy.
Every dividend investor eventually picks a side. Either you take the large payment now from a mature company that will never grow it much, or you take the small payment from a company raising it hard and wait. The argument between the two camps is conducted almost entirely in anecdotes, which is odd, because it is arithmetic and it takes about four minutes.
Here are the four minutes.
The numbers, since nobody does them
Ten thousand dollars, two ways. One pays 7% and raises it 2% a year. The other pays 3% and raises it 10% a year. Nothing else differs, which is unrealistic and is the point: it isolates the only variable anybody is actually arguing about.
| Year | 7% at 2%, that year | 3% at 10%, that year | 7% total so far | 3% total so far |
|---|---|---|---|---|
| 1 | A$700 | A$300 | A$700 | A$300 |
| 5 | A$758 | A$439 | A$3,643 | A$1,832 |
| 10 | A$837 | A$707 | A$7,665 | A$4,781 |
| 13 | A$888 | A$942 | A$10,276 | A$7,357 |
| 20 | A$1,020 | A$1,835 | A$17,008 | A$17,182 |
There are two crossovers, and everybody argues about the first
In year thirteen the grower's annual payment passes the high yielder's. This is the moment the growth camp is describing when it says compounding wins, and it is true.
Show the numbers
| 3% growing 10% a year | 7% growing 2% a year | |
|---|---|---|
| Year 1 | A$300 | A$700 |
| Year 2 | A$330 | A$714 |
| Year 3 | A$363 | A$728 |
| Year 4 | A$399 | A$743 |
| Year 5 | A$439 | A$758 |
| Year 6 | A$483 | A$773 |
| Year 7 | A$531 | A$788 |
| Year 8 | A$585 | A$804 |
| Year 9 | A$643 | A$820 |
| Year 10 | A$707 | A$837 |
| Year 11 | A$778 | A$853 |
| Year 12 | A$856 | A$870 |
| Year 13 | A$942 | A$888 |
| Year 14 | A$1,036 | A$906 |
| Year 15 | A$1,139 | A$924 |
| Year 16 | A$1,253 | A$942 |
| Year 17 | A$1,378 | A$961 |
| Year 18 | A$1,516 | A$980 |
| Year 19 | A$1,668 | A$1,000 |
| Year 20 | A$1,835 | A$1,020 |
It is also not the moment that matters, because you do not spend an annual rate. You spend cash, and cash accumulates. Look at the last two columns. The high yielder has been handing over more money every year for twelve years and it has a lead worth roughly three thousand dollars at the point where the annual figures cross. That lead takes another seven years to erode.
Total cash does not cross until year twenty. Nineteen years in which the boring high payer put more money in your hand, which is most of the time an ordinary person spends investing.
Show the numbers
| 3% growing 10% a year | 7% growing 2% a year | |
|---|---|---|
| Year 1 | A$300 | A$700 |
| Year 2 | A$630 | A$1,414 |
| Year 3 | A$993 | A$2,142 |
| Year 4 | A$1,392 | A$2,885 |
| Year 5 | A$1,832 | A$3,643 |
| Year 6 | A$2,315 | A$4,416 |
| Year 7 | A$2,846 | A$5,204 |
| Year 8 | A$3,431 | A$6,008 |
| Year 9 | A$4,074 | A$6,828 |
| Year 10 | A$4,781 | A$7,665 |
| Year 11 | A$5,559 | A$8,518 |
| Year 12 | A$6,415 | A$9,388 |
| Year 13 | A$7,357 | A$10,276 |
| Year 14 | A$8,392 | A$11,182 |
| Year 15 | A$9,532 | A$12,105 |
| Year 16 | A$10,785 | A$13,047 |
| Year 17 | A$12,163 | A$14,008 |
| Year 18 | A$13,680 | A$14,989 |
| Year 19 | A$15,348 | A$15,988 |
| Year 20 | A$17,182 | A$17,008 |
What franking does here, which is less than you would think
The Australian instinct at this point is to reach for franking, on the grounds that a fully franked 7% is really 10% and that surely changes things.
It changes the size and not the date. If both companies are fully franked, the gross up multiplies both streams by the same number, and multiplying both sides of an inequality by the same figure leaves the inequality exactly where it was. Both crossovers land in the same years. More money, same calendar.
Where franking does move the answer is when the two sides are franked differently, and they usually are. The high payer is often a mature Australian company franking fully. The fast grower is often smaller, or foreign, and a foreign dividend carries no franking at all. That widens the starting gap and pushes both crossovers years further out.
The maths is easy and the maths is not the problem
Every number above follows from two growth rates that were typed in with total confidence, and that is the weak joint in the whole exercise.
Ten percent dividend growth sustained for twenty consecutive years is a claim about a company almost nobody has met. Very few businesses manage it, the ones that do are expensive precisely because everyone can see them, and a single flat year moves the crossover out by more than the argument usually allows for.
The 2% side is no safer. A high payer growing slowly is often a business with limited reinvestment options, which is fine, and sometimes one whose earnings are cyclical, which is not the same thing at all. Growing at 2% assumes it does not cut, and a cut resets the entire table rather than bending it.
So the honest reading of the numbers above is "the grower wins in year twenty if two rates hold for two decades", and nobody knows that about anything.
What actually decides it
The date you need the money.
If you need income inside the next decade, the arithmetic is not close and no amount of conviction about compounding changes it. If the money is genuinely untouched for twenty years and more, the grower is ahead on both measures and getting further ahead every year after that, which is the case the growth camp should be making and usually does not, because it prefers to argue about year thirteen.
Most people are somewhere in between and own some of each, which is the correct answer to a question whose input is a date they do not know precisely.
One thing the table cannot show: reinvesting the income instead of spending it changes both crossovers, and a reinvestment plan quietly changes your share count while it does so.
The growth half of this argument gets tested twice a year
Every figure in that table depends on raises that have not happened yet, and each one is announced, on a date, by a company. Dividend Guardian works from what your holdings have actually paid, shows what that comes to across a year and which months it lands in, and tells you when a company confirms the number has changed. Which is how you find out whether the growth you were counting on is arriving. Start free, with no account and no broker login.
For A$6 a month or A$60 a year, Guardian keeps watching: every payment recorded per share, your income by company and by sector, and a note when a company confirms a change to what it pays. There's a 30 day money-back guarantee.
Build my Dividend PaycheckDividend Guardian provides information and estimates from public data, not personal financial advice, and nothing here is a recommendation to buy, hold or sell anything or to prefer any strategy. The table is arithmetic on made up growth rates, not a forecast, not a company, and not a suggestion that any real holding will behave that way. Tax depends on your own circumstances and belongs with the ATO or a registered tax agent. Guardian reports confirmed changes; it does not predict them.