What are some good dividend stocks to buy? The right answer depends on your financial goals.
With dividend stocks, there’s usually a trade-off between yield and reliability. Said another way, the dividend-payers that generate maximum income for your investment dollar aren’t always the most dependable. And the most dependable dividend stocks, well, they may not deliver the highest payouts.
Yield Vs. Reliability
This trade-off makes sense. Dividends consume a lot of cash. For a company to pay dividends reliably for decades—through good economies and bad—its use of capital must be disciplined. Aggressive growth strategies or aggressive shareholder payments can put the dividend program at risk.
Fortunately, you’re an investor, not a CEO. You don’t have to make a full trade-off between yield and reliability. You can balance the two through diversification.
To find the balance that suits your comfort level, read on for a closer look at higher yielding dividend stocks, followed by a review of the most reliable dividend payers. From there, we’ll walk through key dividend metrics that’ll help you choose your best investments.
With inflation at a 40-year high running at more than 6%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Click here to download “Five Dividend Stocks To Beat Inflation,” a special report from Forbes’ dividend expert, John Dobosz.
Highest Yield Dividends
As a reminder, dividend yield is the annual dividend payment divided by the stock price. If you buy a stock for $100 and the annual dividend payout is $5, the yield is 5%.
The highest-yield dividend stocks and funds pay out in the range of 5% to 12% or more. Generally, the higher the yield, the more likely it is to be inconsistent or unsustainable.
Zim: A High-Yield Example
Container shipping company Zim Integrated Shipping Services (ZIM) is an interesting example of a high-yield dividend payer. Zim’s share price in the fourth quarter of this year has remained in the low-to-mid-$20s. Including the December dividend, Zim will pay $27.55 per share in dividends in 2022. That’s an astronomical (and not sustainable) yield above 100%.
Zim’s 2022 shareholder payments included a special dividend of $17 per share in March. Thanks to rising shipping costs and volume, the company’s cash on hand ballooned compared to the prior year. Shareholders were the beneficiaries. Since then, Zim’s declared dividends were:
- $2.85 in May
- $4.75 in August
- $2.95 in December
You can see the company is committed to returning value to shareholders. But, those payments fluctuate by a wide margin.
It’s also noteworthy that Zim’s share price has been volatile. In March 2022, Zim traded in the low-$70s. In the fourth quarter, Zim’s price remained below $30.
What To Watch For With High Dividend Yields
You can take a calculated risk on a high-yield dividend stock like Zim, but it’s smart to ask a few questions first. Topics to focus on are the stock’s price trend and the company’s growth initiatives.
1. Declining Share Price
A declining share price mathematically pushes dividend yield higher. Remember our $100 stock that yields 5%? If that stock’s price dips to $75 and the dividend remains the same, the yield rises to 6.7%.
Share prices decline when investors lose confidence in the company’s ongoing ability to create value. The underlying factors can be related to the economy, the industry or the company itself.
If you see a declining share price trend, look to understand why. A temporary issue may not change the appeal of a stock, but a longer-term problem would.
2. Lack Of Acceptable Growth Initiatives
A company has two main choices for using its excess cash. It can fund growth initiatives, such as geographic expansion, acquisitions or product development. Or, it can return excess cash to its shareholders through dividends or stock repurchases.
If excess cash is funneled entirely to shareholders, it could mean the company doesn’t have any acceptable growth opportunities. That doesn’t bode well for the stock’s long-term prospects.
Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes’ dividend expert, John Dobosz.
REITs Vs. Traditional Stocks
REIT stands for real estate investment trust; these are companies that own and manage real estate and related assets. As you research high-yielding dividend-payers, you may notice that REITs often have higher yields than traditional stocks.
There are two main reasons for this. First, REITs by law, must distribute 90% or more of their income to shareholders. Second, the REIT business model tends to produce lots of reliable cash, by way of rents or mortgage payments.
REITs And Stocks With High Dividend Yields
The table below shows eight popular stocks and REITs that yield 5.5% or more.
The two double-digit yields here come from mortgage REITs. You can see oil and gas and telecom companies are also on the list. While some industries can support higher yields better than others, remember to keep your dividend portfolio diversified. Long term, broad industry exposure will serve you better.
Best Companies That Offer Dividends
If you are prioritizing dividend sustainability over yields, your analysis should take a different track. You’re not looking for the highest yield with an acceptable risk level. Instead, you’re seeking the best all-around companies that also pay dividends. These stocks will generally have solid business fundamentals plus a long track record of increasing dividend payments.
Dividend Kings And Aristocrats
You can shortcut your research by starting with Dividend Kings and Dividend Aristocrats. Dividend Kings have increased their shareholder payments annually for the most recent 50 consecutive years. Aristocrats have raised their payouts in each of the last 25 years.
A decades-long history of cash payments to shareholders is informative. It tells you the company’s leaders know how to achieve growth, while funding dividends. The leadership team has also been effective at navigating economic downturns, without disrupting shareholder payments.
Notably, Dividend Kings and Aristocrats are also S&P 500 companies. That means they meet the S&P 500’s standards for capitalization, liquidity and profitability.
Top Dividend Kings
You might assume that Dividend Kings and Aristocrats have low yields across the board. Fortunately, that’s not the case. While you don’t see a lot of high yields in this group, there are exceptions, including tobacco company Altria, which is also included in the high-yield list above.
The table below highlights eight popular Dividend Kings and Aristocrats that deliver yields above 2.5%.
These aren’t your only choices, of course. There are many more solid companies with shorter track records that pay nice yields. The list of metrics below can help you find them.
How To Pick The Best Dividend Stocks: 5 Metrics To Check
There’s more to picking the best dividend stocks than yield and dividend track record. As you research prospective dividend stocks and REITs, look at how much the dividend has grown in recent years, along with the stock’s total annualized returns, earnings growth, cash flow and liquidity.
1. Dividend Growth Trend
You want to see a consistent history of measurable dividend growth. Ideally, the stock will show regular dividend increases that, on average, track with inflation. That tells you the dividend’s purchasing power is keeping pace with the economy.
2. Total Return
A stock’s total return considers capital gains and dividends. If a $100 stock increases in value by $10 in one year, the return is 10%. If a different $100 stock appreciates by $8 and pays a $3 dividend, the return is 11%. On the second stock, you don’t get the whole picture if you evaluated only the appreciation or the dividends. You must consider both.
You can use the total return percentage to compare the performance of dividend-payers to indexes and to your other investment opportunities.
3. Three-Year Earnings Growth
Dividend growth over time requires earnings growth. Review the company’s earnings history and verify that it’s positive and consistent.
You may see temporary disruptions due to economic or financial market trends, especially in 2022. Evaluate those disruptions by comparing them to close industry competitors and the overall market.
Some downturns aren’t avoidable. But, the companies that are good at managing through downturns often make better investments.
4. Cash Flow
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Cash pays dividends. A company’s ability to generate increasing cash flow over time is critical to the longevity of its dividend program. Review a company’s free cash flow trends over the past several years.
You can also look at the company’s cash payout ratio. This is the dividend as a percentage of cash flow.
The metric is related to the more commonly cited payout ratio, which is the dividend as a percentage of earnings. The standard payout ratio can be problematic because earnings can be affected by one-time, non-cash accounting adjustments.
5. Debt/Asset Ratio
The debt/asset ratio shows you how much debt finances the company’s assets. This is a measure of financial strength and an indication of a company’s ability to meet its obligations.
To calculate the ratio, divide total liabilities by total assets. If the resulting number is 0.75, for example, it means 75% of assets are financed with debt. The remaining 25% is financed with equity. The higher this number, the weaker the company’s financial position.
Diversify Your Dividend Stocks
The best dividend stocks produce a rising yield, supported by long-term stock price appreciation, growth in earnings and cash flow, and financial strength. Fortunately, these are all metrics you can evaluate before you invest.
Still, there is the chance a company’s situation can change suddenly. That’s why it’s important to diversify across individual stocks and industries. Experts recommend holding 20 to 30 individual stocks. Alternatively, you could invest in dividend funds that are diversified for you.
One last piece of advice. Before you embark on your dividend investing journey, make sure you understand and plan for the tax consequences of dividend income. That way, you can enjoy your new income stream without any bad surprises from Uncle Sam.
Five Top Dividend Stocks to Beat Inflation
Many investors may not realize that since 1930, dividends have provided 40% of the stock markets total returns. And what is even lesser known is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains. If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging. Click here to download the report.
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