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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 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.
» Looking for stability in your portfolio? Consider TIPS to combat inflation
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.
» Looking for passive income? Learn what it is and how to start earning it.
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.
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 primary 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 to buy stocks
25 high-dividend stocks
Below is a list of the 25 highest-dividend stocks in the S&P 500, ordered by annual dividend yield.
Data is intended solely for informational purposes, not for trading purposes.
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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.