Stocks That Pay Good Dividends
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When you buy a stock, you become a partial owner in a company. As a partial company owner, you are entitled to a share of the company’s profits.
The payouts companies dispense to shareholders are called dividends. Dividend payments are your portion of company profits—think of it as a reward for sticking with a company rather than just buying and selling short term.
For many people, being able to retire and live off of passive income is the dream. In fact, that is one of the main reasons people invest in stock in the first place; to have a stream of passive income that they can tap into when necessary.
Investing in high-dividend stocks is a great way to secure funds for retirements and ensure you always have some form of income. You can also reinvest your dividends to buy more shares and reap more dividends down the road.
Dividend stocks are valued based on their dividend yield, the quotient of the total amount of dividend paid per share and the price of an individual share. Dividend yields are usually calculated based on annual dividends.
For example, if a company pays out $0.50 in dividends annually per share and its shares are priced at $10, then the dividend yield is 5%. (0.50/10 = 0.05). Dividend payouts vary according to the company but they usually come out to less than 1$ per share.
All other things being equal, the higher the dividend yield, the more income from dividends you receive will be higher. So if you want to invest funds for long-term financial security, your best bet is to look at high dividend-yield stocks.
The 4% Rule
If you are investing money to secure dividends for retirement, we need to talk about the 4% rule. The 4% rule is a general rule of thumb that states you should withdraw no more than 4% from your retirement account for each year of retirement.
The idea behind the 4% rule is to have enough money to live off during retirement while keeping enough in your portfolio to consistently generate income. The 4% rule was devised by experts as the optimal percentage to withdraw without depleting your nest egg over 30 years.
Considering that the majority of your income during retirement will come from interest and dividends, financial experts recommend the ideal dividend yield should hover around 4%. That is, you should try to invest in companies that have a 4% dividend yield. Most companies pay out dividends quarterly so you want to make sure
One more important thing: when it comes to dividends, a higher dividend yield is not always better. Generally, stocks that have dividend yields over 10% are viewed with suspicion.
An extremely high dividend yield compared to competitor companies could signal that the growth is unsustainable or that stock price is being driven down to inflate dividend payouts. Either way, stocks with dividend yields of 10%+ need to be handled carefully.
Also, it is important to keep in mind that dividend yields can be affected by movements in the larger economy. For example, investors lost a ton in dividends during the 2009 recession when the housing market crashed. The possibility of falling dividend yields is another reason why it is important to diversify your portfolio to insulate yourself from risk.
How to Pick the Best Dividend Stock
Dividend investing is based around finding long-term sustainable growth. Several well-known investors such as Warren Buffett orient their entire investing strategy around top-notch dividend-paying companies.
The ideal is to find a stock with a high dividend yield and then reinvest a portion of those dividends to buy more stock. Over time this compounding process will raise your wealth exponentially.
It can be a bit tough to know what kinds of stocks to look for. Simply looking at the current dividend yield is not enough as that figure is not necessarily stable and could change.
You need to identify the fundamental factors of a company that show it will be able to keep making dividend payments into the near future. Here are a few key indicators to look for when hunting for dividend stock.
The first thing to look for is a company that has a solid profit margin. If companies you are looking at do not have good profit figures, cut them out of your list.
Don’t just look at profit amount either but profit growth. It is possible to get good dividend returns from high-profit companies with low profitable growth, but there is no good reason to choose a company like that over one with profitable growth.
A far as earning expectations, the gold standard is between 5% and 15 projected earnings growth. You don’t want to invest in a company with a larger than 15% growth expectations as any rate that high is very difficult to maintain and is certainly expected to hit a backlash in the future.
At the same time, the company you invest in needs to have a large cash flow. The bigger the cash flow, the more liquid assets they can payout to investors.
This is one major reason why utility companies have such strong dividend payouts; they have a sizable consumer base and extremely high revenue from providing basic services. Utility companies pull in a lot of cash income so they are great at paying out dividends.
Lastly, look for companies that have shown continual dividend growth for at least 5 years. Once dividend growth hits the magic 5-year mark, it is more likely they will continue to grow in the future.
One thing many investors neglect to look at is the state of the industry or sector as a whole. They get so caught up in the technical minutiae of dividend yields and quarterly revenue and miss the forest for the trees.
Case in point; many experts predict declining revenue in oil industries as renewable energy and non-oil sources of energy become more popular in the near future. Conversely, the aging boomer population is expected to cause the healthcare services industry to grow significantly over the next 20 years.
The key point here is that you cannot just go on history. Things change sometimes and a trend of increasing dividends may not continue in the future if it’s subsumed in a dying industry.
To be certain, even industries that are in good shape aren’t completely immune to market plunges. They do tend to be more resilient than other stocks though.
Avoid Very High Dividend Yields
If you are investing for long-term financial security, then it’s recommended you stay averse to stocks with high dividend yields 10%-12%+. While many investors go into dividend investing looking exclusively at dividend yields, ultra-high dividend yields are mostly always unsuitable for long-term investing.
The reason why is that high dividend yields over 12% are usually unsustainable in the long run. When the dividend yield is that high, it’s a good chance it cannot be maintained and the dividend payouts will decrease.
A good example of this in practice is REITs. Many REITs have great dividend yield figures but when you look under the hood things aren’t as good as they seem, with things like unsustainable payouts, or dangerously high-interest rates (that being said, there are some solid REITs for dividend investing which we will cover later).
Hence why many dividend investors like to look at the fundamentals of a company to predict investing performance rather than purely technical figures and data. Fundamental analysis can do a good job of telling you if some current dividend production is sustainable or not.
That is why experts recommend dividend investors invest in stock with a yield between 4%-7%. These values tend to be stable enough for consistent growth and generate enough income so you can rely on dividend payouts for retirement.
Look for Dividend Reinvestment Programs
Reinvesting dividends is one of the smartest strategies to build wealth and long-term financial security. The idea is simple; every quarter or month when you get a dividend payout, you take some portion of it and reinvest it back into the company.
You then get a larger payout next dividend payout which means you can reinvest a larger portion into the company, and so on. You can see how this can lead to incredible gains in the long term.
Try investing in company stocks that have a dividend reinvestment program. These programs automate the reinvestment process and you can specify whether you want to put back in some, none, or all of your dividends.
Qualified and Non-Qualified Dividends
Since dividends are considered a source of income, they are usually subject to federal and state taxation. There are two types of dividends that have different tax rules.
Qualified dividends are taxed at the same rates as capital gains taxes, which for most people comes out to about 15%. In general, only stocks that have been held onto for more than a year are eligible to produce qualified dividends.
In contrast, nonqualified (or unqualified) dividends are counted as regular income and are taxed based on income bracket. So if you are in the 22% tax bracket then you would pay 22% taxes on your dividend income.
Some high dividend-yielding stocks like REITs are always taxed at regular income rates. If you have stocks that produce dividends your broker will likely provide you with the 1099-DIV form that outlines how much you earned and how much you owe.
If you are investing in some kind of tax-advantaged account like an IRA or work 401(k) then you can avoid paying direct taxes on dividends until you start withdrawing the money. Roth IRA are already taxed before the money is put in so you will never have to pay taxes to access a Roth IRA.
It often makes more sense to invest in a tax-deferred account rather than a tax-exempt account. For instance, if you are currently in the 24% tax bracket by expect to be in the 12% bracket when you retire, it might make more sense to invest that money into a tax-deferred account to avoid paying 24% on it now and instead pay 12% on it later.
Watch Out for Debt
Lastly, and this goes without saying, don’t invest in a company that has a large amount of debt. Specifically, you need to look at the company’s debt-to-equity ratio.
If the ratio is over 2.0 then look elsewhere, though the ideal D/E ratio is below 1.0. The higher the D/E ratio then that means the company will have to pay off that debt at some point. When that happens, dividend payouts are likely to decrease as that money goes towards paying the debt.
10 Stocks that Pay Dividends
Here are our picks of some of the best dividend stocks to invest in for long-term financial security and retirement. Dividend yield percentages have been calculated using annual dividend amounts.
1. International Business Machines (IBM)
IBM is one of the world’s largest computing technology companies and has a history of generating consistent dividends while maintaining high levels of growth. With a total market value of $120 billion, IBM is one of the most successful information technology companies in the world.
Although the price of IBM’s stock has been on a steady decline for the past 2 years, the company has recently expanded its cloud presence via the $34 billion acquisition of Red Hat so it can be more competitive with other cloud competitor mainstays such as Microsoft and Amazon.
IBM has also been touting plans for the first-ever commercially available quantum computer. They do currently have quantum cloud services available for the public, but with limited applications.
Despite the recent drop in share prices, IBM still have strong dividend yields. IBM has been paying dividends to investors since 1916 and is currently on a 24-year streak of increasing dividends. So even if IBM’s growth has slowed in recent years, it is still a solid choice of dividend stock.
2. Realty Income
Considering that Realty Income often calls itself “The Monthly Dividend Company,” it’s a no-brainer that it got a spot on our list.
Usually, real estate companies have high dividends but can be very susceptible to volatile changes in the market. Realty Income is one of those real estate investment trusts (REIT) that break this mold and give reliable dividends without much risk.
Since the company’s IPO in 1994, Realty Income has managed to show a 4.5% annual dividend increase for 88 consecutive quarters. Even better, the company pays out dividends per month rather than per quarter like most companies.
The amazing feat is that Realty Income has achieved such a stable dividend growth with a relatively bland real estate portfolio. The average Realty Income property is a Walgreens or a 7-Eleven; not exactly what you would call flashy investments.
Of course, this relative blandness is how Realty Income achieved such stable growth. The trick is that Realty Income invests in retail properties that are relatively immune from e-commerce. For example, most of their properties are drug stores and dollar stores; stores that can get people things they need much faster than e-commerce stores.
It might not be the highest dividend producing stock out there but Realty Income is probably the absolute best REIT dividend stock to invest in.
3. Toronto-Dominion Bank (TD Bank)
Toronto-Dominion Bank has been paying out dividends since 1857—that’s right, TD Bank has been around since before Lincoln was president and before the Civil War. It is the 5th largest bank in North America by assets and the bank has the no.1 market share in retail banking in Canada.
TD Bank pays much higher dividends than several US banks because of Canada’s financial history. Canada has not seen a major financial crisis in almost 200 years.
They even managed to dodge the worst effects of the 2008 global financial recession. This makes TD dividend payouts not purvey to the Federal Reserve which is why they have such high dividend payouts for a bank.
Even during the 2008 financial crisis, TD managed to increase dividend payouts, which makes it an ideal candidate for investors who are looking for dividend returns. TD still occupies a relatively small area of the US—mostly the East Coast—so there is still plenty of room for growth for US-based investors.
4. Verizon Communications
Communications technology giant Verizon currently owns and operates the world’s largest 4G network and plans to make 5G standard in the States this year.
It is believed that this high-quality 5G network will stimulate revenue growth, something that Verizon has been falling behind in recently.
Verizon only showed a 0.6% revenue growth and 2.5% profit growth in 2019, and predictions for 2020 hover at about the same levels. Verizon itself says that the new 5G network is not expected to impact revenue growth until 2021.
The upshot is that since cell service is practically a utility now, Verizon makes a lot of money that they can funnel into growing dividend payouts. Stable revenue equals stable dividends for shareholders. Over the past 5 years, Verizon has shown a consistent 2.70% dividend growth rate each year.
The one thing that could hurt Verizon’s dividend yield is if other competitors quickly ramp up their cellular service quality. However, several experts believe Verizon will still have the upper hand in the coming years due to its early start on 5G networks.
5. Duke Energy
Utility companies generally have very stable dividends for investors. The reason why is that utility companies like electric and gas companies provide basic necessities so they can be relied on to generate a lot of revenue.
Duke Energy owns and distributes electricity to over 7 million customers across the American Southeast and Midwest and gas to nearly 2 million customers over 4 states. Their utility generated revenue has only been increased by population migration to the Southeast. For example, the company recently invested more than $1 billion in Florida and is expected to spend nearly $500 million to upgrade its Midwest grid.
Duke Energy has maintained a regular dividend payout for over 90 years, though the most recent spike in dividend growth has occurred over the past 12 years. Again, growth for the company is pretty slow at a projected 3.5% for 2020, but the extremely high percentage of cash earnings allow that they can consistently pay dividends to investors.
6. Brookfield Infrastructure Partners
Up next is another large utility company, this one involved in several aspects of national infrastructure. Brookfield Infrastructure Partners is one of the single largest infrastructure assets companies in the world and work in transport, energy, communications, and utilities sectors.
Brookfield has an established pattern of taking some asset that is not doing well and bringing out its full potential. It has a track record of making smart acquisitions and turning around failing companies.
Like most utility companies, Brookfield is a reliable investment for good dividend returns. Utility companies in general tend to be large, have a reliable user base, and fairly standard and expected costs so they usually make great dividend investments. They have managed to maintain an over 3% dividend for 12 years since their formation in 2008.
These figures indicate that Brookfield can maintain a sustainable payout ratio while having steady dividend growth. This is the ideal combination for dividend stock. They have assets in 35 businesses around the world and aims to grow its dividend annually by 5%-9% in the coming years.
The aging of the population means that in the near future there will be an explosion in demand for healthcare-related services such as doctors and specialized living facilities. Companies poised to take advantage of this specialized real estate boom will be well rewarded.
Ventas is a healthcare-focused real estate investment trust that boasts an impressive 5.6% dividend yield, fairly high compared to some other REITs.
Since construction in the senior living accommodation industry is still low and is expected to increase rapidly in the coming years, now is a good time to invest in Ventas stock. As the number of senior living spaces is expected to increase, that means healthcare-focused real estate investment companies will have a substantial cash flow to pay dividends from.
It also helps that Ventas is one of the most diversified healthcare REITs around and have properties in offices, research facilities, living spaces, and hospital/health care facilities. Some experts think that dividend growth might shrink by a bit as Ventas goes through a rough patch, but it is expected to make a recovery in the following year.
This current rough patch is caused by a glut of senior living properties which has driven prices on living spaces down. Most experts agree that this temporary mismatch between supply and demand will correct itself soon with the eventual aging of baby boomers.
8. NextEra Energy
Another electrical utility, NextEra Energy is poised to reap the benefits of the renewable energy market, which is expected to reach a total of $2,151 billion by 2025.
NextEra Energy also had a really good 2019 which saw a 36% share growth that blew the utility industry average of 22% out of the water. Their average growth was higher than the average growth of the S&P 500 last year, pretty impressive for a utility company.
NextEra’s stock remains bullish and the company claims that is project pipeline and new Green energy division will cause the company great growth in the coming years. NextEra has also seen good returns on infrastructure programs in Florida and experts expect this trend to continue.
NextEra’s own projection over the next few years involves 8% annual growth and a significant jump in dividend yields. Even though a yield of 2.1% is on the lower side of good dividends stock, NextEra has seen a massive 72% increase in dividend payouts over the past 5 years, so now might be the perfect time to invest and hop onto the bullish trend.
9. Prudential Financial
Prudent Financial is an insurance company specializing in life insurance policies, annuities, and retirements replate products. The company manages in total over $1 trillion in assets and has offices on 4 continents.
Prudential Financial is set for a big year in growth due to their recent acquisition of Assurance IQ and their insurance planning technology.
Assurance IQ has tech that lets individuals pick customer plans including life, health, and auto insurance. This addition of direct consumer channels signals a period of growth for the company.
Company execs expect that recent acquisition to start reaping profits in early 2020 and eventually create nearly $100 million in annual savings. That means more revenue that can be put into dividend payouts.
Unfortunately, the share price of Prudential is expected to stall in the short-term, due to recession-related issues and low-interest rates. But their company’s high-quality business platform is expected to generate growth in the long-term.
Despite these recent share dips, Prudential managed to increase the account value of its customers by 11% for an all-time record of $218 billion and it had the strongest sales growth in life insurance offerings ever.
Prudential also pumped more than $1.2 billion last year into its dividend payouts and has experienced continuous dividend growth for a decade with an average of 11.5% growth for the past 5 years. The average dividend payout is $1 per quarter for a $4 annual total.
Prudential’s new direct-to-customer platform and good growth statistics make it an ideal candidate for dividend stock in the financial sector. If one can weather a relatively stagnant share growth in the near future, the aging population is expected to cause a boom in life insurance and retirement planning services, all of which are in Prudential’s unique niche.
Given that cell phone communications are essentially a utility now, telecommunications companies have a large pool of cash revenue for paying out dividends. This makes telecommunications companies a great option for stable dividend stock.
AT&T has a total market value of $234.5 billion and a current dividend yield of 6.2%, one of the highest out of all communications companies. AT%T has also managed to continually increase its dividend payout for 34 consecutive years.
AT&T has also recently undergone some dramatic structural changes. The company merged with Time Warner and acquired DirecTV and now has more than 170 direct-to-consumer relationships across phone, TV, and internet.
The real benefit of AT&T is that due to its wide customer base, they have a massive cash flow so even if the share price drops in the coming years, it is unlikely that this would significantly affect dividend payouts. These features all make AT&T a particularly attractive dividend stock. AT&T fairs slightly better than Verizon, another on our list, in terms of dividend amounts and has a better one-year target estimate.
Some experts see the recent acquisition of Time Warner as negative in terms of dividends. AT&T’s recent acquisition shows the company is slowly moving away from being a utility provider, which is what generates the most consistent dividend payments. However, the presence of several marquee properties in the deal such as HBO and Tuner could give the company more direct-to-consumer relationships.
AT&T is also expected to drop a new streaming service soon following on the heels of Disney+. If the streaming service gets a sizable subscriber base that is another source of cash flow for the company that can be put into dividend payments.
When it comes to long-financial security, dividends are the way to go. Investing in good dividend stock can grant you a reliable source of passive income and give you a way to pursue other interests.
The key thing to remember is that dividends are a long term plan. You should not rely on dividend payments to get rich in the short term.
Reaping the maximum benefit from dividends takes a long time and you will inevitably have to ride out negative market conditions. That’s ok; it’s to be expected. Dividend stock rewards those who are patient and can wait out the bad times.