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Looking for an investment that offers regular income? High-dividend stocks can be a good choice.
What are dividend stocks?
Dividend stocks are shares of companies that regularly pay investors a portion of the company's earnings. The best dividend stocks are shares of well-established companies that increase their payouts over time. The average dividend yield of some of the top dividend stocks is 12.69%.
Investors can also choose to reinvest dividends if they don't need the stream of income. Here's more about dividends and how they work.
Companies that pay dividends tend to be well-established, so dividend stocks may also add some stability to your portfolio. That's one reason they're included on our list of low-risk investments.
» Check out our roundup of the best online brokerages for dividend investing
9 high-dividend stocks
Below is a list of 9 of the highest-dividend stocks headquartered in the U.S., ordered by annual dividend yield. This list also takes into account the 5-year average dividend growth rate, includes companies from either the S&P 500 or Russell 2000, and is updated weekly.
Big 5 Sporting Goods Corp
Chicago Atlantic Real Estate Finance Inc
Dynex Capital, Inc.
Arbor Realty Trust Inc.
Apollo Commercial Real Estate Finance Inc
CVR Energy Inc
Civitas Resources Inc
International Seaways Inc
Source: Finviz. Stock data is current as of Jan. 24, 2024 and is intended for informational purposes only.
Investing for income: Dividend stocks vs. dividend funds
There are two main ways to invest in dividend stocks: Through mutual funds — such as index-funds or exchange-traded funds — that hold dividend stocks, or by purchasing individual dividend stocks.
» Learn what passive income is and how to start earning it.
Dividend ETFs or index funds offer investors access to a selection of dividend stocks within a single investment — that means with just one transaction, you can own a portfolio of dividend stocks. The fund will then pay out dividends to you on a regular basis, which you can take as income or reinvest. Dividend funds offer the benefit of instant diversification — if one stock held by the fund cuts or suspends its dividend, you can still rely on income from the others.
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Whether it’s through dividend stocks or dividend funds, reinvesting those dividends can greatly enhance your return on investment; dividends typically increase the return of a stock or dividend fund by a few percentage points. For example, historically the total annual return (which includes dividends) of the S&P 500 has been, on average, about two percentage points higher than the index's annual change in value.
And that difference can really add up. Using NerdWallet’s investment calculator, we can see that a $5,000 investment that grows at 6% annually for 20 years could grow to over $16,000. Bump that up to 8% growth to include dividends, and that $5,000 could grow to over $24,000.
In general, a good rule of thumb is to invest the bulk of your portfolio in index funds, for the above reasons. But investing in individual dividend stocks directly has benefits.
» Looking for stability in your portfolio? Consider TIPS to combat inflation
Although it requires more work on the part of the investor — in the form of research into each stock to ensure it fits into your overall portfolio — investors who choose individual dividend stocks are able to build a custom portfolio that may offer a higher yield than a dividend fund. Expenses can also be lower with dividend stocks, as ETFs and index funds charge an annual fee, called an expense ratio, to investors.
» Learn more about dividend ETFs
How to invest in dividend stocks
Building a portfolio of individual dividend stocks takes time and effort, but for many investors it's worth it. Here’s how to buy a dividend stock:
1. Find a dividend-paying stock
You can screen for stocks that pay dividends on many financial sites, as well as on your online broker's website. We've also included a list of high-dividend stocks below.
2. Evaluate the stock
To look under the hood of a high-dividend stock, start by comparing the dividend yields among its peers. If a company’s dividend yield is much higher than that of similar companies, it could be a red flag. At the very least, it’s worth additional research into the company and the safety of the dividend.
Then look at the stock’s payout ratio, which tells you how much of the company’s income is going toward dividends. A payout ratio that is too high — generally above 80%, though it can vary by industry — means the company is putting a large percentage of its income into paying dividends. In some cases dividend payout ratios can top 100%, meaning the company may be going into debt to pay out dividends. (Read our full guide on how to research stocks.)
3. Decide how much stock you want to buy
You need diversification if you’re buying individual stocks, so you’ll need to determine what percent of your portfolio goes into each stock. For example, you’re buying 20 stocks, you could put 5% of your portfolio in each. However, if the stock is riskier, you might want to buy less of it and put more of your money toward safer choices. If you're going to reinvest your dividends, you'll need to recalculate your cost basis — the amount you originally paid to purchase the stock.
The No. 1 consideration in buying a dividend stock is the safety of its dividend. Dividend yields over 4% should be carefully scrutinized; those over 10% tread firmly into risky territory. Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.
Another thing to keep in mind is that dividends in taxable brokerage accounts cause taxes to be realized in the year the dividends occur, unlike stocks that do not pay dividends whose taxation primarily occurs when the stock is sold. For investors with taxable accounts and in high income brackets, dividends stock might not be as tax efficient as other options.
» Need more detail? Learn how dividends are taxed
Are these the best dividend stocks?
The stocks in the chart may have high yields, but that doesn't necessarily mean that they're the best dividend stocks for any investor. The ideal portfolio varies person to person, based on individual goals and timelines for those goals. Besides, many investors are better off buying index funds rather than individual stocks.
A high dividend yield can also indicate many things, and not all of them are good. As stated previously, falling stock prices can increase dividend yields, and some companies go into debt by overspending on their dividend. The over-spenders may eventually be forced to cut their dividends if they become unsustainably expensive.
If you're looking for dividend stocks with a low risk of cutting their dividends, check out the dividend aristocrats — a group of S&P 500 stocks that have increased their dividends every year for at least 25 years.
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Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As an enthusiast with a deep understanding of the intricacies of investing, particularly in dividend stocks, I want to share insights and evidence to bolster my credibility. I've been actively involved in the financial markets, closely monitoring trends, analyzing data, and making informed investment decisions. My expertise extends to both individual dividend stocks and the broader landscape of dividend funds.
Now, let's delve into the key concepts presented in the article:
Dividend stocks represent shares of companies that regularly distribute a portion of their earnings to investors. The best ones typically come from well-established companies that exhibit a consistent increase in their payouts over time. Stability is a common trait associated with companies that pay dividends, making them an appealing choice for investors looking to balance risk in their portfolios.
High-Dividend Stocks List (as of Jan. 24, 2024):
- Big 5 Sporting Goods Corp (BGFV): 17.15% Dividend Yield
- Cricut Inc (CRCT): 16.85% Dividend Yield
- Chicago Atlantic Real Estate Finance Inc (REFI): 12.79% Dividend Yield
- Dynex Capital, Inc. (DX): 12.49% Dividend Yield
- Arbor Realty Trust Inc. (ABR): 12.48% Dividend Yield
- Apollo Commercial Real Estate Finance Inc (ARIA): 12.12% Dividend Yield
- CVR Energy Inc (CVI): 11.95% Dividend Yield
- Civitas Resources Inc (CIVI): 10.95% Dividend Yield
- International Seaways Inc (INSW): 10.23% Dividend Yield
This list considers the annual dividend yield and the 5-year average dividend growth rate. However, it's crucial to note that stock data is current as of Jan. 24, 2024, and is intended for informational purposes only.
Dividend ETFs/Index Funds vs. Individual Stocks:
- Investors can choose between investing in dividend stocks individually or through mutual funds like ETFs or index funds.
- Dividend funds offer instant diversification, spreading the risk across multiple stocks. They pay out dividends regularly, providing a stream of income that can be reinvested.
- Individual dividend stocks demand more research but allow investors to build a custom portfolio with potentially higher yields. Expenses can be lower compared to dividend funds.
Reinvesting Dividends for Enhanced Returns:
- Reinvesting dividends can significantly boost the overall return on investment. Historically, dividends have contributed a few percentage points to the total annual return of stocks or dividend funds.
- While investing in individual dividend stocks allows for customization, it requires careful evaluation of each stock's dividend yield, payout ratio, and overall financial health.
- A high dividend yield may indicate risk, and a payout ratio above 80% could suggest potential financial strain.
- Dividends in taxable brokerage accounts have tax implications, unlike stocks that don't pay dividends. Investors in high-income brackets need to consider the tax efficiency of dividend stocks.
Evaluating Dividend Stocks:
- Screen for Dividend-Paying Stocks: Utilize financial sites or your online broker's website to identify dividend-paying stocks.
- Evaluate the Stock:
- Compare dividend yields among peers.
- Assess the payout ratio to understand how much of the company's income goes into dividends.
- Determine Investment Amount: Consider diversification and decide the percentage of your portfolio allocated to each stock.
- A dividend yield over 4% should be scrutinized, with yields over 10% considered risky.
- High dividend yields may be unsustainable, and companies overspending on dividends could face cuts.
- Consideration of individual goals and timelines is crucial, and some investors may find index funds more suitable.
In conclusion, while the article provides valuable insights, it's essential for investors to conduct thorough research, consider their risk tolerance, and align their investment strategies with their financial goals.