Best Dividend Stocks
This is not really stock trading.
A dividend is a payment issued by a company to distribute to shareholders.
When a company becomes very profitable and stable, its leaders may decide to pass along some of the profits to its shareholders.
Essentially, for every share of a dividend stock that you own, you are paid a portion of the company’s earnings. You get paid simply for owning the stock!
For example, let’s say Company X pays an annualized dividend of 20 cents per share. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of 20 cents (or 5 cents) for each share you own.
This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years. The key is to reinvest those dividends!
For the company, the decision to pay a dividend is important. It communicates to stock holders that it's affairs are going well, that it has sufficient funds to reinvest in its operations and to reward shareholders for this. These are the best dividend stocks.
These stocks are also called Income Stocks.
Stocks purchased for income tend to be those of larger, more established Large Cap or Blue Chip stocks, that can afford to share their profits directly with shareholders.
Investors who are interested in making decent returns from their investments without having to absorb as much risk as Small Cap stocks or Growth stock, are more likely to par-take in Dividend stock investing because of the presumed stability of the companies behind them.
By investing in dividend stock for income, you are investing in more established companies that would be more likely to survive even during difficult economic times.
And when good times roll around, your investment could increase in value just as well as a smaller Growth stock.
How do you find the best Dividend Stocks? By studying the company fundamentals, and determine the percentage yield that your investment will earn for you.
Just as if you were to invest your money in a bank account.
Types of Dividends
Instead the dividends paid will automatically buy additional shares of that company. These plans are beneficial to investors as they allow them to receive any growth from the stock as well as gains from compounding.
When an investor enrolls in a dividend reinvestment plan, he/she will no longer receive dividends in the mail or directly deposited into their brokerage account. Instead, those dividends will be used to purchase additional shares of stock in the company that paid the dividend.
There are over 1000 companies and closed-end-funds that have their own DRIP plans. In addition, investors can reinvest dividends from most companies through their broker.
Enrolling in a DRIP is fairly easy. Most major brokers make enrollment simple and painless and will charge little or no commission. Cash dividends paid by the company are automatically reinvested into additional shares. Once the investor has enrolled in a DRIP, the process becomes entirely automated and usually requires minimal attention or monitoring.
Over the long term, enrolling stock in a DRIP plan can increase the value of an initial investment substantially.
The vast majority of dividends are paid four times a year on a quarterly basis, but some companies pay their dividends semi-annually (twice a year), annually (once a year), monthly, or more rarely, on no set schedule whatsoever (called “irregular” dividends).
For U.S. stocks in particular, there are no “set in stone” rules dictating the frequency of dividend payouts. That is to say, corporations have the freedom to set their own payout policies regarding both the size and timing of their distributions.
With that being said, there is a tradition that most regular corporations will pay out a dividend to their shareholders on a quarterly basis, which aligns with the legal requirement to report earnings on a quarterly basis. Ultimately, the decision of how of often dividends will be paid out is left to a company’s board of directors.
One reason for calculating the dividend yield for an Income Stock, is to be able to make comparisons between different types of investments for the best dividend stocks.
Dividend yield is the relation between a stock’s annual dividend payout and its current stock price. Depending on how much a stock price moves during the day, the dividend yield is constantly changing as the price of the stock changes.
For a company that has a stock price that is trending upward, it will need to raise its dividend payout in order to maintain its dividend yield. For example. if a stock goes up by 50%, but does not raise its dividend, its yield will drop significantly
While the investor who seeks to profit from capital gains growth has little basis for comparison between growth stock and other investments because of the unpredictability of that growth, the income stock-minded investor can compare the dividend yield offered by such investments as bonds, bank accounts, money markets etc.
If you purchase a stock that offers you a dividend yield of 5%, you are better off here than in a Money Market fund offering 2%.
Add to that the fact that with stocks you always have the possibility of capital appreciation and you could be looking at a very nice capital gain as well.
The dividend yield of a stock is calculated by dividing the annual dividend by the price you paid per share of stock.
So if you purchased MicroSoft share at $100, and their annual dividend payout is $5 per share, your dividend yield on this investment would be 5% ($5 divided by $100 = .05 x 100 = 5%).
Only those corporations with a continuous record of steadily increasing dividends over the past 20 years or longer should be considered as the best dividend stocks. Furthermore, the investor should be convinced the company can continue to generate the cash flow necessary to make the dividend payments.
If you look at the subprime mortgage mess from 2007-2009, companies were sometimes showing yields in the 10%-20% range, but that was only because the stock price had been hit hard, which resulted in a higher dividend yield. So, be careful when you are excited about jumping into a stock, just because the yield may be high.
When analyzing a high yield dividend stock for the best dividend stocks, it is always important to determine why the stock’s yield is so high.
There are two reasons why a stock may have an above average yield.
When a stock price declines and the dividend payout remains the same, the dividend yield will increase. For example, if stock XYZ was originally $50 with a $1.00 annual dividend, its dividend yield would be 2%. If that stock’s share price fell to $20 and the $1.00 dividend payout was maintained, its new yield would be 5%. While this 5% dividend yield may be attractive to some dividend investors, this is a value trap.
It is always important for investors to understand why a stock’s yield is abnormally high. A company that has a stock price that has fallen from $50 to $20 is probably struggling and should not be considered a solid investment.
Real Estate Investment Trusts (REIT) and Master Limited Partnerships (MLP) are very popular among dividend investors as they tend to offer much higher dividend yields than stocks. These companies tend to offer high dividends since they are required to distribute at least 90% of earnings to shareholders in the form of dividends.
These companies do not pay regular income tax on a corporate level, instead the tax burden is passed down to the investor.
The Ultimate Dividend Playbook
A great resource fo learning how to find the best dividend stocks is The Ultimate Dividend Playbook by Josh Peters.
Josh Peters is the editor of Morningstar DividendInvestor. Josh holds a BA in economics and history from the University of Minnesota Duluth and is a CFA charterholder.
The Ultimate Dividend Playbook will help you frame an approach —emotional as much as intellectual or financial— and assemble a portfolio of well-chosen, dividend-rich stocks that can deliver the income and growth you seek.
This book fresh look at the best dividend stocks and equips the individual investor for financial success through Josh's dividend-achieving approach. He shows how to put the three dividend plays of income, insight, and independence into practice so that dividends will put cash in your pocket regardless of the fads and failings of Wall Street.
Josh Peters also takes you through the insides of a corporation and the factors that allow it to pay and raise dividends, tells how to separate safe dividends from risky ones, and explains how to construct a portfolio of dividend-paying stocks to meet your financial needs.
Filled with in-depth insights and practical advice, The Ultimate Dividend Playbook will help you find high-quality, best dividend stocks to build your portfolios for the long haul.