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. Here’s more about dividends and how they work.)
Dividend stocks tend to be less volatile than growth stocks, so they can also help diversify your overall portfolio and reduce risk.
Investing for income: How to buy dividend stocks
We’ll cover two ways to invest in dividend stocks here: Through exchange-traded funds that hold these stocks, and by purchasing individual dividend stocks. Let’s start with dividend ETFs, since they’re the easiest entry.
Investing in dividend stocks through ETFs
Like much in the world of ETFs, dividend ETFs offer a simple and straightforward solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend.
A dividend ETF typically includes dozens, if not hundreds, of dividend stocks. That instantly provides you with diversification, which means greater safety for your payout: Even if a few of the fund’s stocks cut their dividends, the effect will be minimal on the fund’s overall dividend. A safe payout should be your top consideration in buying any dividend-paying investment.
Here’s how to buy a dividend stock ETF:
1. Find a broadly diversified dividend ETF. You can typically find dividend ETFs by searching for them on your broker’s website. (No broker? Here’s how to open a brokerage account.)
Probably the safest choice is a low-cost fund that picks dividend stocks from the S&P 500 stock index. That offers a broadly diversified package of top U.S. companies.
2. Analyze the ETF. Make sure the ETF is invested in stocks (also called equities), not bonds. You’ll also want to check the following:
- The dividend yield. This is how much a company pays out in dividends each year relative to its share price, and is usually expressed as a percentage.
- 5-year returns. Generally, higher is better.
- Expense ratio. This is the ETF’s annual fee, paid out of your investment in the fund. Look for an expense ratio that is under 0.50%, but lower is better.
- Stock size. Dividend ETFs can be invested in companies with large, medium or small capitalization (referred to as large caps, mid caps and small caps). Large caps are generally the safest, while small caps are the riskiest.
3. Buy the ETF. You can buy ETFs just like you’d buy a stock, through an online broker. A good approach is to buy them regularly, to take advantage of dollar-cost averaging.
Investing in individual dividend stocks
Building a portfolio of individual dividend stocks takes time and effort, making it more complex than investing through a dividend ETF. But by picking and choosing your dividend stocks, you have the potential to personalize a portfolio and find higher dividends than in an ETF.
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.
» Learn more: How to research a stock
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.
List of 25 high-dividend stocks
Below is a list of 25 high-dividend stocks, ordered by dividend yield. The dividend shown below is the amount paid per period, not annually.
|Symbol||Company name||Dividend||Dividend yield|
|NHI||National Health Investors Inc. (REIT)||$1.10||9.27%|
|MO||Altria Group Inc.||$0.84||9.27%|
|CM||Canadian Imperial Bank of Commerce||$1.46||7.32%|
|BNS||The Bank of Nova Scotia||$0.90||7.08%|
|BMO||Bank of Montreal||$1.06||6.76%|
|PFG||Principal Financial Group Inc.||$0.56||6.66%|
|TD||The Toronto-Dominion Bank||$0.79||5.73%|
|IBM||International Business Machines Corp.||$1.63||5.58%|
|STX||Seagate Technology Plc||$0.65||5.41%|
|TRP||TC Energy Corp.||$0.81||5.24%|
|OMC||Omnicom Group Inc.||$0.65||5.18%|
|RY||Royal Bank of Canada||$1.08||5.12%|
|BXP||Boston Properties Inc. (REIT)||$0.98||5.11%|
|EVBN||Evans Bancorp Inc.||$0.58||5.02%|
|SLF||Sun Life Financial Inc.||$0.55||4.86%|
|MTB||M&T Bank Corp.||$1.10||4.76%|
|BOH||Bank of Hawaii Corp.||$0.67||4.66%|
|CFR||Cullen/Frost Bankers Inc.||$0.71||4.50%|
|PSA||Public Storage (REIT)||$2.00||4.47%|
|GPC||Genuine Parts Co.||$0.79||4.45%|
Stock data current as of May 15, 2020.
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