Everything You Need To Know To Invest In Dividend Stocks

Investing in dividend stocks is a strategy for investors focused on earning consistent income from their stock holdings. Dividend investors prefer undervalued stocks that offer dividends rather than overvalued stocks that do not. They believe that dividends represent real cash paid to shareholders, which reflects the company’s true earnings and financial health.

A company that has a history of raising its dividend regularly is likely to have a solid business model. Conversely, a company that cuts or suspends its dividend is often facing financial difficulties.

What makes dividend stocks really attractive is that they can provide income during economic stagnation. Dividends can generate income and help rack up the return on investment. Think of this as a safety net for stock investing. Looking to invest in dividend stocks? Our guide will walk you through the process of dividend investing, step by step.

How to purchase dividend stocks: Your step-by-step guide

Dividend investing involves a more passive approach to investing, focusing on stocks that pay regular dividends. Here’s a breakdown of the steps involved in investing in stocks with dividends:

Step 1: Open a Brokerage Account: The first step is to open a brokerage account. This can be done easily online and doesn’t require immediate funding. Since dividend investing is less active than other trading styles, most online brokers are suitable for this strategy.

Step 2: Fund Your Account: Once your account is approved, you’ll need to fund it. You can do this through various methods such as bank transfer, wire transfer, check, or transferring funds from an existing investment account.

Step 3: Choose Dividend Stocks: Selecting the right dividend stocks is crucial. Many online brokers offer stock screeners that can help you filter for dividend-paying stocks. Consider factors like dividend yield, payout ratio, industry, and market sector. It’s also important to evaluate the market capitalization, risk, and technical analysis of potential investments.

Step 4: Monitor Your Stocks: Regular monitoring is essential for dividend investing. Track the overall performance of your stocks, as well as the performance of the sectors and industries they belong to. Ensure that dividends continue to be paid and ideally, that they are increasing. Additionally, assess the company’s ability to sustain dividend payments through its earnings and financial health. This involves analyzing factors like the quality of earnings, debt-to-equity ratio, and other fundamental metrics.

Step 5: Receive Your Dividends: Dividends are typically paid quarterly. There are four key dates related to dividend payments: the declaration date, ex-dividend date, record date, and payable date. The declaration date announces the dividend amount and the other relevant dates. The ex-dividend date is the last day to buy the stock and still receive the dividend. The record date is the day you must own the stock to receive the dividend. Finally, the payable date is when the dividend is actually paid to shareholders.

How to choose a dividend-paying stock

Finding the best dividend stock isn’t as simple as picking stocks whose dividends have the highest yield. Such a simplistic approach is a recipe for disaster. While dividend investors like stocks with higher yields, there are plenty of factors you need to look at when considering a dividend stock.

Assess the company’s dividend paying track record

The reliability of dividends is a key factor to consider when investing in stocks. To give you an example, consumer products company Procter & Gamble has paid dividends consistently since 1891. While the stock price hasn’t always risen, shareholders have received dividends even during downturns.

Calculate your payback period

Although future stock performance is unpredictable, calculating a payback period helps set a baseline expectation for recouping your initial investment. By considering dividend payments, you can ask: If the stock price doesn’t appreciate, how long would it take for dividends to cover my initial investment?

Look at the dividend yield

To understand the return you are getting for every dollar you invest in a company, you need to look at the dividend yield. This will show how a company’s dividend payments relate to the stock price. To calculate the dividend yield, divide the annual dividends paid per share by the current share price.

Evaluate the payout ratio

To assess the sustainability of the dividends, a useful measure to look at is the dividend payout ratio. This shows what percentage of its earnings the company pays out to its shareholders as dividends. To calculate it, divide the total dividend payments by the total net income generated.

A range of 30% to 55% is considered a healthy payout ratio by dividend investors. A higher payout ratio may be heading to unsustainable territory, but that also depends on the industry and the company’s level of maturity.

Understand the stock’s fundamentals: Is the dividend sustainable?

Choosing a good dividend stock isn’t that different from choosing any other stock. You need to understand a company’s business model by reading its company reports and other research. If you know its advantages and disadvantages, it will be easier to forecast its long-term potential for upholding a dividend.

You would also want to judge if the company’s growth is organic or driven by acquisitions, its debt dynamics, and ability to generate cash for dividend and reinvestment. That will help you evaluate if there are dividend increases in the offing.

It also helps to know a company’s commitment to its dividend and its potential for sustainable growth as those two factors will determine if it’s able to meet its dividend pledges.

Also, like any other stock, you want to make sure the stock’s price isn’t overly expensive considering the fundamentals and outlook. While a good dividend stock will make money in the long run, you also want to see share price appreciation. That’s easier if the stock isn’t overbought.

Where to buy dividend stocks? Top platforms for dividend investing

Some of the top brokers for buying dividend stocks, dividend ETFs and dividend mutual funds:

Admirals: The Cyprus-based platform, formerly known as Admiral Markets is a leading online broker providing diverse investment opportunities across various asset classes, including forex, CFDs, stocks, ETFs, bonds, commodities, and cryptocurrencies. Allows fractional trading.

eToro: The Israeli company boasts user-friendly social trading features, including copy trading, along with a diverse mix of asset classes. These include stocks, ETFs, cryptocurrencies, commodities and forex. It also allows the purchase of fractional shares.

Vanguard: Known for its low-cost index funds and ETFs, Vanguard is a great choice for long-term investors. It offers a variety of dividend-focused funds and a user-friendly platform.

Fidelity: The US company offers a wide range of investment options, including dividend stocks and ETFs. It has a user-friendly platform, excellent customer service, and a wealth of educational resources.  

Charles Schwab: The US company is a great all-around broker with a strong focus on ETFs. It offers a variety of account types, low fees, and a robust trading platform and offers fractional shares. It recently purchased TD Ameritrade, which had a user-friendly platform and a good selection of stocks and ETFs.

Interactive Brokers: The US brokerage offers a powerful trading platform with advanced tools and features for active traders. It has varied investment options, including dividend stocks and ETF, and fractional shares.  

Comparing the top brokers that offer dividend stocks

Platform	Choice of investments	Account minimum	Trading fee
Admirals	Forex, CFDs, stocks, ETFs, bonds, commodities, and cryptocurrencies	Between $1 and $100, depending on account type	$0.02 USD per share on buying or selling stocks, ETFs, funds.
Vanguard	Funds, stocks, bonds, ETFs	Begin at $1,000 depending on fund or ETF	No commissions on trades for stocks, ETFs or mutual funds.
eToro	Stocks, bonds, forex trading	$50	No commissions on self-directed trades
Fidelity	Shares, funds, ETFs, investment trusts and bonds	None	No commission on US shares, ETFs, $1 on some bonds
Charles Schwab	Funds, ETFs, shares, bonds.	None	None on listed stocks or ETFs, $6.95 on OTC stocks
Interactive Brokers	Stocks, bonds, ETFs commodities, forex.	None	IBKR Pro commissions range from USD 0.0005 to USD 0.0035 per share on stocks while IBKR Lite offers free trading on US stocks.

How do stock dividends work?

Dividend payments are based on the number of shares you own. For example, if you have 100 shares of a stock priced at $1 per share and the company pays a 25% dividend, you will receive $25 in a quarterly dividend.

Cash dividends are either sent as a check or directly deposited into your brokerage account. Stock dividends are paid in fractional shares. If a company issues a 5% stock dividend, you’ll receive 0.05 shares for every share you own.

There are specific dates to remember when it comes to dividends. The declaration date is when the company announces the dividend. The ex-dividend date is the last day to buy the stock and still receive the dividend. The record date is when you must own the stock to receive the dividend. The payment date is when the dividend is paid. The settlement date is when the stock purchase or sale is finalized.

There are different ways to measure dividends. The dividend rate is the percentage of the stock price paid as a dividend. The dividend payout ratio is the percentage of company earnings paid as dividends. The dividend yield is the annual dividend divided by the stock price.

Types of dividend-paying companies 

There are several types of dividend stocks. Most US stocks that pay dividends pay them quarterly, but companies based in Europe often have an interim and year-end dividend. The best dividend stocks are those that have a history of increasing their dividends, and there are three categories of these types of stocks.

Dividend achievers

This group of stocks is a collection of publicly traded companies that have consistently increased their dividend payouts for at least 10 consecutive years, but less than 25 years. These companies trade on major stock exchanges like the NYSE or Nasdaq and have a minimum daily trading volume of $1 million.

There are approximately 400 Dividend Achievers on the Nasdaq, representing a diverse range of industries including consumer goods, industrials, financials, and utilities. Notable examples of Dividend Achievers include well-known companies such as Microsoft.

Dividend aristocrats

This list includes 66 members of the S&P 500 that have increased their dividend payouts for 25 or more consecutive years, but fewer than 50 years. This list includes such well known companies as Exxon Mobil and McCormick & Co. 

Dividend kings

This elite list includes any 53 companies in the S&P 500 that have raised their dividend for 50 or more consecutive years. The list includes some big-name companies, including Johnson & Johnson and PepsiCo. 

Why invest in dividend-paying shares? 

Dividend-paying stocks are a favorite of many investors. If you’re looking for a steady source of income and lower volatility, dividend shares often fit that description. Companies that have the free cash flow to regularly pay and raise their dividends tend to handle economic downturns better than companies that don’t deliver a regular dividend. The ability to regularly pay a dividend is often a characteristic of more established companies and is a sign of financial health.

There may be a second correlation between successful stocks and companies that pay dividends. As value-oriented investors often favor dividend paying stocks, they are exactly the type of investors who aren’t likely to bolt during a slight downturn, meaning that dividend stocks enjoy ‘customer loyalty‘ that keeps their shares from falling too far.

Three ways of investing for dividends

Method 1: Picking individual companies that pay high dividends

Use a stock screener first to find stocks that pay high-yielding dividends. The sweet spot is often between 3% and 5%. Above that level, be careful, because the company’s payout ratio may be too high to sustain its dividend. After you’ve made a list of high-yielding stocks, select those that have strong financials, a solid track record of growing a dividend and an economic advantage.

Method 2: Buying dividend-focused mutual funds 

Dividend-focused mutual funds are investment pools that primarily invest in stocks of companies with a history of paying regular dividends. The objective of these funds is to provide investors with a steady stream of income, often in the form of quarterly dividend payments.  The purpose of dividend-focused mutual funds is generating regular dividend income for investors while seeing capital appreciation as the stocks in the fund increase in value. By using a diversified basket of stocks, it is easier to spread risk for investors across sectors and industries.

Unlike ETFs, which often are passively managed, mutual funds often use professional managers to optimize and manage risk. Because of this, their expense ratios tend to be higher than in dividend-oriented ETFs. There are three main types of dividend-focused mutual funds:

• Dividend Growth Funds: These funds invest in companies with a history of increasing their dividends over time.  
• High-Dividend Yield Funds: These funds focus on stocks with high dividend yields, often from mature, established companies.
• Equity Income Funds: These funds invest in a mix of dividend-paying stocks and growth stocks, seeking a balance of income and capital appreciation.

Method 3: Investing in dividend appreciation or high-dividend yield ETFs 

Dividend ETFs provide high yields to investors by investing in common stocks, preferred stocks, or REITs with substantial dividend payouts. These ETFs can focus solely on US stocks or adopt a global approach, encompassing international securities.

Dividend ETFs are passively managed. They track a specific index that the manager often screened quantitatively to include companies with a history of dividend increases and established, lower-risk blue-chip firms. The underlying indexes of dividend ETFs typically prioritize stocks with above-average dividend yields and high liquidity. However, managers can adjust the composition of the ETF based on their investment strategy.

To be competitive, a dividend ETF’s expense ratio should be comparable to or lower than the least expensive no-load mutual fund. No-load mutual funds carry no commissions or sales charges.

Dividend ETFs are particularly well-suited for risk-averse investors seeking income from their stock investments.

What are some of the best dividend stocks in the US market right now?

Let’s look at some of our picks of the best dividend stocks currently available on US stock exchanges.

Company	Ticker	P/E	Dividend Yield	Revenue change YTD in most recent quarter	Share price change YTD
HSBC Holdings	NYSE: HSBC NVDA	7.61	6.88%	+13.36%	+10.76%
LyondellBasell	NYSE: LYB	12.32	6.12%	+2.45%	-9.05%
Novartis	NYSE: NVS	14.52	3.29%	+9.6%	+12.75%
Exxon Mobil	NYSE: XOM	14.32	3.18%	+12%	+17.06%
PNB Baribas	OTC: PNBQY	7.98	7.04%	+6.08%	+1.25%
Zurich Insurance Group	OTC: ZURVY	17.83	4.75%	+7.28%	+15.20%
Franklin Resources	NYSE: BEN	12.65	6.12%	+7.82%	-30.74%
GSK	NYSE: GSK	15.18	4.01%	+9.84%	-0.16%
Ford	NYSE: F	11.68	5.41%	+6.35%	-8.76%
NewLake Capital Partners	OTC: NLCP	15.65	8.73%	+9.48%	+21.83%

How did we choose the above stocks? 

When making these picks, we looked for stocks that were potentially undervalued, with a price-to-earnings ratio below 20. We included those that had an above average yield of 3% or more. We chose companies that were coming off a quarter where the company posted either revenue or net income growth or both.

To learn more about dividend investing and to find dividend ideas in other markets, check out our guides on the best UK dividend stocks, the best Australian dividend stocks, and the best dividend stocks in Canada as well.

The pros and cons of investing in dividend stocks

While there are plenty of reasons to buy dividend stocks, whether they’re right for you depends on your own investment strategy, risk tolerance and what the rest of your portfolio looks like. Most portfolios, however, would benefit from quality dividend stocks. We compiled some of the pros and cons of dividend stocks:

Pros

• Regular Income: Dividend stocks offer a regular stream of income, which can be particularly beneficial for retirees or those seeking additional income.
• Potential for Capital Appreciation: While dividends are a key benefit, dividend-paying stocks can also appreciate in value over time.
• Lower Volatility: Dividend-paying stocks tend to be less volatile than growth stocks, as they are often associated with mature, stable companies.
• Sign of Financial Health: Companies that pay dividends often have strong financial positions and a history of consistent earnings.

Cons:

• Lower Growth Potential: Dividend-paying companies may prioritize dividend payouts over reinvesting in growth opportunities.
• Risk of Dividend Cuts: In times of economic downturn or financial distress, companies may reduce or eliminate dividends.
• Tax Implications: Dividend income is often subject to taxes, which can impact your overall return.
• Opportunity Cost: Investing in dividend stocks may limit your exposure to higher-growth opportunities.

This post originally appeared at ValueWalk.com.

Category: Dividend Stocks