What are dividend stocks?

Dividend stocks are a type of stock that distributes 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. This allows investors to build an annuity-like cash stream. (Investors can also choose to reinvest dividends if they don’t need the stream of income. For more information about dividends and how they work, see this resource.)

Companies that pay dividends are typically well-established, so dividend stocks may add stability to your portfolio. That’s one reason they’re often included on lists of low-risk investments.

Investing for income: Dividend stocks vs. dividend funds

There are two primary methods of investing 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. 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.

Dividends can enhance your return on investment, typically by a few percentage points. For example, the total annual return of the S&P 500, which includes dividends, is on average about two percentage points higher than the index’s annual change in value.

“The difference between 6 and 8 percent growth annually can have a significant impact on investments over 20 years. For example, according to NerdWallet’s investment calculator, a $5,000 investment that grows at 6 percent annually for 20 years could grow to over $16,000. Bump that up to 8 percent growth to include dividends, and that $5,000 could grow to over $24,000.”

A good rule of thumb for investing is to allocate the majority of your portfolio to index funds, as this provides several benefits. Investing in individual dividend stocks also has advantages.

Building a portfolio with individual dividend stocks may offer a higher yield than investing in a dividend fund, though it requires more research on the part of the investor. Expenses can also be lower with dividend stocks, as ETFs and index funds charge an annual fee, called an expense ratio, to investors.

3 Ratios Used to Analyze Dividend Stocks

Dividend Yield:

The dividend yield is calculated by dividing the annual dividend per share by the current stock price.

An example of a high-yielding stock would be company XZY, which issues a dividend of $10 annually with a current share price of $100. This results in a dividend yield of 10% ($10 / $100 = 10%). When screening for high-yielding stocks, investors should consider other factors such as the company’s history and future projections.

Dividend Payout Ratio:  A company with a low DPR may have room to increase its dividend payments.

The dividend payout ratio (DPR) is used to measure how much of a company’s earnings are paid out to shareholders. The ratio is calculated by dividing total dividends by net income. A company with a low DPR may have room to increase its dividend payments.

A company’s dividend reinvestment rate (DRP) is the percentage of its net income that it pays out in annual dividends. For example, if company XYZ reported a net income of $50,000 and paid out $15,000 in annual dividends, it would have a DRP of 30% ($15,000 / $50,000 = 30%). A company that pays out less than 50% of its net earnings in dividends is generally considered to be stable and has the potential for sustainable long-term earnings growth.

Dividend Coverage Ratio:  This ratio measures the number of times a company can pay dividends to its shareholders. The dividend coverage ratio is calculated by dividing a company’s annual earnings per share (EPS) by its annual dividend per share.

For example, if company XZY reported $10 million in net income with an annual dividend of $2 million to shareholders, it has a dividend coverage ratio of 5 times. This means that the company’s net income is five times its annual dividend payout to shareholders. Typically, investors view a higher dividend coverage ratio as more favorable.

Advantages of Dividend Stocks

There are two key advantages to investing in dividend stocks: generating a passive income and reinvesting dividends.

Passive Income:

Companies that pay dividends typically issue them quarterly, which creates a reliable stream of passive income for investors to spend as they please. Dividends also have the added advantage of offsetting share price depreciation.

Dividend Reinvestment:

Dividend reinvestment plans (DRIPs) allow investors to reinvest dividends they receive back into the company to acquire more shares. This is a proven strategy to build long-term wealth.

How to invest in dividend stocks

It takes time and effort to build a portfolio of individual dividend stocks, but it can be worth it for many investors. Here’s how to buy a dividend stock:

1. To 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. A list of high-dividend stocks is also included below.

2. To evaluate a high-dividend stock, compare 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.

When looking at stocks, it is important to look at the payout ratio. This will give you an idea of how much of the company’s income is going towards dividends. A payout ratio that is too high can be an indicator that the company is putting a large percentage of its income into paying dividends, which may not be sustainable in the long run.

3. Determine how many stocks you would like to purchase and the percentage of your portfolio you are willing to invest in each stock. Consider diversifying your portfolio by investing in a variety of stocks to reduce risk. If you reinvest your dividends, remember to recalculate your cost basis.

The safety of a dividend stock’s dividend should be the primary concern when considering purchase. Dividends yielding over 4% require close inspection; those over 10% are considered risky. A dividend yield that is too high can be indicative of an unsustainable payout, 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.

14 high-dividend stocks

1. Lowe’s (NYSE:LOW):

While it may not seem like an exciting stock, Lowe’s offers dividend growth potential. The company has raised its dividend every year since going public in 1961 and has raised the payout a massive 471% over the past decade alone. Furthermore, with the average U.S. home being 37 years old, the next generation of DIYers is likely to spend a lot of money at Lowe’s.

2. Walgreens Boots Alliance (NYSE:WBA):

As one of the largest retail pharmacy operators in the world, Walgreens is undergoing a massive turnaround with actions that lower costs, increase digital sales, and adding full-service healthcare clinics in hundreds of its retail locations.

Becoming a more integrated healthcare company is fueling its already generous dividend to even higher levels. With a dividend yield well above 4.5% at this writing and six decades of annual payout growth, Walgreens stock is appealing to dividend investors.

3. Realty Income (NYSE:O):

If you’re looking for a simple way to invest in high-quality real estate for income and growth, Realty Income Corporation (NYSE: O) might be the perfect stock. The company owns a wide array of largely e-commerce-resistant properties, earning strong cash flows from tenants on long-term leases. Realty Income is also a Dividend Aristocrat, having 27 consecutive years of dividend increases (along with 53 straight years of paying investors every month).

4. Johnson & Johnson (NYSE:JNJ):

Johnson & Johnson’s extensive portfolio of well-known brands offers consumers reliable products they can trust, especially in the healthcare space. In addition to its Band-Aid, Neutrogena, Tylenol, Zyrtec, Benadryl, and Johnson’s brands, the company has profitable pharmaceutical and medical device divisions that have allowed it to increase its dividend for 60 consecutive years. This diverse range of consumer health, pharmaceutical, and medical device offerings is unrivaled and has been a major contributor to Johnson & Johnson’s profitability.

However, management thinks this “conglomerate” structure has limited the company’s ability to focus its resources and announced plans in late 2021 to split the consumer products business into a separate company. This split is expected to happen in 2023, with existing shareholders receiving shares of both companies.

5. Target (NYSE:TGT):

In the competitive discount retailing world, Target has demonstrated that it doesn’t need to compete on price to be successful. For years, it has been more profitable than its peers, with some of the highest gross margins and operating margins in retailing. Additionally, its focus on increasing its e-commerce business and expanding in-store offerings has kept sales–and profits–growing steadily. With dividend growth at 50 years and counting,Target should be on the radar for dividend investors.

6. Brookfield Infrastructure Corp. (NYSE:BIPC):

Brookfield Infrastructure is a hidden gem among dividend stocks, with a dividend yield near 3% at recent prices and a goal to raise the payout 5% to 9% annually. The company owns water, energy, utility, transportation, and communications infrastructure all over the world, which generates steady, recession- and inflation-resistant cash flows.

7. Microsoft (NASDAQ:MSFT):

Microsoft is one of the largest companies in the world, with a stead increase in sales. The company’s focus on recurring, or subscription-based, revenue sources is an especially attractive feature for dividend investors. Microsoft also has a solid balance sheet, with more cash than debt, and a very low payout ratio that leaves plenty of room to increase the dividend. The company has increased its dividend for 12 consecutive years, so it’s likely that Microsoft will soon join the Dividend Aristocrats club.

8. American Express (NYSE:AXP):

Financial services offer opportunities to find a handful of top dividend stocks, and American Express is one of the best. While not a Dividend Aristocrat, AmEx has a decades-long track record of either raising or maintaining its dividend through every economic environment. That’s a credit to its high-quality lending standards and its focus on higher-income consumers who are less likely to default on their debts during weak economic periods. This makes it both a safe investment for long-term investors and a reliable source of dividends.

9. Clearway Energy (NYSE:CWEN.A):

Renewable energy is an opportunity for both growth and dividend investors. Clearway Energy, which owns and operates utility-scale wind and solar assets, is a perfect example. The company invests in, acquires, and operates these facilities, selling the power on very long-term contracts to utility companies. If you’re looking for a lower-volatility, safer way to profit from renewables, Clearway Energy is an excellent choice.

10. Annaly Capital Management Inc. (NLY)

• Forward Dividend Yield: 14.99%
• Payout Ratio: 36.27%
• Price: $5.87
• Market Cap: $10.1 billion
• 1-Year Total Return: -25.3%1

Annaly Capital Management is headquartered in New York City.

Annaly Capital Management, Inc. is a real estate investment trust that employs a diversified investment strategy focused on mortgage-backed securities backed by government-sponsored enterprises, residential mortgage loans, commercial mortgage loans and other real estate-related investments. The Company is externally managed and advised by Annaly Mortgage Management, LLC.

On September 8th, the company’s board of directors approved a 1-for-4 reverse stock split. The company also announced that their third-quarter common stock dividend would be $0.88, maintaining the $0.22 per share dividend before their reverse stock split. The dividend is payable October 31st to shareholders as of September 30th, 2023.

11. OneMain Holdings Inc. (OMF)

• Forward Dividend Yield: 12.18%
• Payout Ratio: 84.07%
• Price: $31.19
• Market Cap: $3.9 billion
• 1-Year Total Return: -39.5%1

OneMain Holdings Inc. offers personal loans to non-prime customers and provides origination, underwriting, and servicing for these loans. The company operates through the Consumer & Insurance and Other segments.

12. Lumen Technologies Inc. (LUMN)

• Forward Dividend Yield: 12.02%
• Payout Ratio: 52.33%
• Price: $8.32
• Market Cap: $8.6 billion
• 1-Year Total Return: -27.8%1

The company operates in more than 170 countries and has over 200,000 employees.

Lumen Technologies is a global technology and communications company that provides an integrated platform of network assets, cloud connectivity, security solutions, and voice and collaboration tools to help businesses use their data and adopt new technologies. Lumen serves customers in more than 170 countries worldwide and employs over 200,000 people.

On September 13th, the company announced that Kate Johnson had been appointed as the new President and Chief Executive Officer, effective November 7th. Johnson has most recently been leading Microsoft U.S. She takes over from Jeff Storey, who will remain with the company until December 31st, 2022 to help with the transition.

13. Rithm Capital Corp. (RITM)

• Forward Dividend Yield: 11.89%
• Payout Ratio: 49.83%
• Price: $8.41
• Market Cap: $3.9 billion
• 1-Year Total Return: -16.9%1

Rithm Capital Corporation, formerly known as New Residential Investment Corp., is a public real estate investment trust (REIT) investing in the residential housing sector. The company’s portfolio includes mortgage-servicing-related assets, residential loans, non-agency securities, and similar investments. The company announced the change in its name and stock ticker on June 30, 2022. On September 22, Rithm declared a common stock dividend of $0.25 per share for the third quarter of 2022.

The dividend will be paid on October 28th to shareholders who owned the stock on October 4th, 2022. Rithm also announced that dividends for its Series A, Series B, Series C and Series D cumulative redeemable preferred shares will be paid on November 15th to preferred shareholders who owned the stock on October 17th, 2022.

14. Devon Energy Corp. (DVN)

• Forward Dividend Yield: 9.82%
• Payout Ratio: 45.20%
• Price: $63.12
• Market Cap: $41.3 billion
• 1-Year Total Return: 123.7%1

Devon Energy is an oil and gas exploration, development, and production company with a focus on transportation of oil, gas, and related products. Additionally, the company processes natural gas.