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Looking for an investment that offers regular income? High-dividend stocks can be a good choice.
Dividend stocks distribute a portion of the company's earnings to investors on a regular basis. Most American dividend stocks pay investors a set amount each quarter, and the top ones increase their payouts over time, so investors can build an annuity-like cash stream. (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.
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.
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.
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. Though 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
The Dividend Aristocrats
Dividend-seeking investors can look for high-yield dividend stocks like those listed on this page, but there’s another factor to consider in dividend investing: consistency, which is especially important for fixed-income investors. And that’s where the Dividend Aristocrats really shine.
The S&P 500 Dividend Aristocrats is a market index that includes select companies from the S&P 500. To be included, companies must:
Have increased dividends every year for the past 25 years.
Have a float-adjusted market cap of at least $3 billion.
Have an average daily trading value of at least $5 million.
The index’s methodology also requires a minimum of 40 companies to be included, and no sector can account for more than 30% of the index’s weight.
So what’s this mean for investors? The Dividend Aristocrats are large companies with reliable dividend payments and high liquidity, and the index as a whole may offer more diversification than high-yield dividend indexes (which are typically heavily weighted toward the financials and utilities sectors). Investors can opt to pick and choose specific Dividend Aristocrats to invest in, or there are ETFs with similar reliability-based criteria. There’s also the S&P 500 High-Yield Dividend Aristocrats index, which has slightly different criteria.
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.)
» Research dividend stocks: Learn about Morningstar Premium
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.
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.
» Need more detail? Learn how to buy stocks
25 high-dividend stocks
Below is a list of 25 U.S.-headquartered high-dividend stocks, ordered by dividend yield. The dividend shown below is the amount paid per period, not annually. To compile this list, we take into account the dividend growth rate over the last five years and the dividend payout percentage, in addition to the dividend yield and amount.
Altria Group Inc.
National Presto Industries Inc.
Iron Mountain Inc.
Philip Morris International Inc.
LyondellBasell Industries NV
Pinnacle West Capital Corp.
Safety Insurance Group Inc.
Gilead Sciences Inc.
National Bankshares Inc.
Principal Financial Group Inc.
Omnicom Group Inc.
American Electric Power Co Inc.
Regency Centers Corp.
Lamar Advertising Co.
Bank of Hawaii Corp.
J.M. Smucker Co.
Evans Bancorp Inc.
Stock data current as of October 6, 2021.
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.