Dividend-paying stocks have long been a part of investment portfolios focused on generating income rather than long-term capital appreciation. But because companies that pay big dividends are often older, more established companies, they fail to attract the same attention as the latest high-flying growth stocks.
Dividend-paying stocks remain a crucial part of any investment strategy, especially if you’re looking for consistent income. Although price appreciation may lag the broader market, companies that pay dividends have made profits and are generally safer investments than risky growth stocks. Still, a healthy dividend is not a golden ticket to wealth and investors should pay close attention to the company’s underlying numbers. A large dividend combined with low cash flow or high debt could turn into a very bad investment.
Stocks with the highest dividends right now
An Overview of Dividend Paying Stocks
When a company makes profits, they don’t just stay in the CEO’s pockets. When earnings are announced, the company’s board of directors must decide what to do with the extra cash. Many companies reinvest their money in research or development in order to continue growing, but some companies don’t care about expanding or entering new markets.
When a company does not have an internal use for its remaining profits, it returns those profits to shareholders in the form of a dividend. Most dividend-paying companies break out dividend payments each quarter, and you must own the stock before the “ex-dividend date” to be eligible for the payment.
The calculation of dividends takes into account a number of factors, such as:
- Sales growth projections
- Expansion projects
- Average Sector Dividend Yield
- Debt Levels
- Current and future cash flows
Be wary of companies offering dividends that seem too good to be true. A stock with a 10% dividend might have suffered a big price drop, making the dividend yield more attractive. Kinder Morgan is a popular example: At one point, the company took on too much debt and the pipeline company was forced to cut its dividend by 75%. As a result, the stock was crushed.
How can you be sure you are investing in the right stocks? You want to differentiate between ordinary dividends And qualified dividends. Ordinary dividends are taxed at the income level while qualified dividends are taxed at the capital gains level. For your dividends to be considered qualified dividends, you must hold the shares for at least 60 days. If you have held the shares for less than 60 days, you will receive the same dividend, but it will be taxed as income.
You should also spend time researching how the company got to where it is. As mentioned above, you want to weigh the dividends paid or promised against the condition of the company. There are some companies that are safe to invest in and stay safe because their dividends are “real”, but others can seem a little shady.
At the same time, we cannot assume that dividends will continue indefinitely. Even the best companies that you have studied to the nth degree are not perfect. There may come a time when a company stops paying dividends on its stock for one reason or another, and it’s not personal. They will simply stop paying dividends.
For example, this company could be bought and privatized. Yes, you will get paid for your holdings, but that long-term dividend is gone. You now need to decide what to do with these funds and potentially discover another business that can offer the same type of “regular” income.
Best Online Brokers for Dividend Paying Stocks
Dividend-paying stocks aren’t hard to find because they often have a long history and popular stories. Since dividend-paying stocks are intended for long-term investing rather than short-term trading, finding a commission-free broker is not as crucial since you won’t accrue trading costs.
Still, if you can avoid the temptation to over-trade, a commission-free discount broker is suitable for both investors with long-term horizons and investors looking to make daily or swing trades.
Traits to Look for in Dividend Paying Stocks
Here are the most important things to look for before investing in high dividend stocks.
Manageable debt load
As with companies like Kinder Morgan, unsustainable debt could mean the end of a generous dividend. If a company is overleveraged and required to repay its debts, the dividend is often the first thing on the chopping block.
Growth in dividend distributions
Since stock prices can fluctuate wildly, paying attention to the dividend yield doesn’t give us as much information as the actual payout amount. Keep a close eye on the growth of the dividend payout itself; If a company has a long history of increasing dividend payments (10-20 years), it’s probably a safe bet that it will continue to increase.
Enough cash to continue paying dividends
This is perhaps the most important characteristic of any stock, let alone paying dividends. Cash flow is king and without it, no company could continue to pay its dividend. If a company you’re looking at has constant cash flow problems, this could mean the dividend is struggling to be cut.
Analyst ratings can give you an idea of when dividends will continue or not. While analysts aren’t necessarily responsible for determining the value of your next dividend, they study the company closely enough to get a good idea of whether or not dividends will continue.
Dividends provide stable income
Dividend-paying stocks are a great addition to portfolios because they are often less risky than growth stocks. If you’re an investor nearing the end of your time horizon, dividend-paying stocks can provide stable income AND longer-term stock price appreciation.
But dividends are not free and tax implications exist for different types of payments. Qualified dividends receive special tax treatment, like capital gains, but ordinary dividends are taxed at the income level. If you receive regular dividends, a tax-sheltered account like a Roth IRA is the best vehicle.
Be sure to discuss taxes with an advisor before placing dividend-paying stocks in an investment account. Understand that dividend stocks won’t make headlines or double in price in just 6 months. If you want to buy dividend-paying stocks, you’ll need to hold them long enough to benefit from consistent dividend increases.
Frequently asked questions
Dividend paying stocks are stocks that pay regular dividends to their holders.
Dividend paying stocks provide recurring income in the form of dividends.
Check out Benzinga’s list of the best dividend-paying stocks from the list above.