Invest in Company Stocks That Pay Dividends
Enjoy High Yield Passive Dividend Income with Less Risk
Conservative long-term investors often build a portfolio of company stocks that pay regular cash dividends. Dividends provide a high-yield passive income for investors who do not want the risks of less solid companies. Dividend-paying stocks are an investment strategy for a slow and steady way to build long-term wealth. Dividends are an important source of investor returns Historically, dividends account for almost half of an investor's total return.
First we clear up your questions about dividends, the dividend yield, high yields and how to research dividends. Then you'll find below suggestions for companies that pay high-yield dividends.
What Are Dividend-Paying Stocks
Publicly-traded companies pay their shareholders dividends when they are profitable, and when they have more than enough cash on hand for future business needs. The dividends are paid in cash four times a year. Sometimes a dividend is paid in additional shares of company stock, and a few companies pay monthly cash dividends, but these cases are the exception. A company that pays dividends is generally large, stable and profitable. Investors prefer companies with a history of increasing their dividends. High-yield dividends let you share in the wealth of a company. Check out these guidelines for dvidend stocks.
Use the Dividend Yield Formula to Compare Stocks
To compare dividends paid by different companies, use the dividend yield. The dividend yield formula is the total of a year's dividends divided by the stock price. For example, Hasbro pays an annual dividend of $1.44 and the stock sells for $37.22, which gives Hasbro a dividend yield of 3.86%. The formula is 1.44 / 37.22 = .0386
The dividend yield changes from day to day as the stock price of the company changes.
The Stock With the Highest Dividend Yield Is Not the Best
The company with the highest dividend yield is not necessarily the best investment. You can see from the formula above that the dividend yield increases when the market price of the company stock drops. A high dividend yield can be a clue to a risky investment. You must determine the likelihood that the company has sustainable profits and can pay future dividends.
Invest in Companies that Increase Dividends Regularly
Profitable companies often increase dividends when their business outlook is positive. On the other hand, companies can cut dividends during hard times. In recent years, the ratio of dividend increases to dividend cuts has been 6 to 1. The best dividend-paying stocks are not those with the highest yield, but those most likely to continue and increase the dividend.
Dividend Paying Stocks Have Less Risk
Stocks that pay dividends are often less volatile than the rest of the market. The dividend payments give investors an additional incentive to buy and hold these shares, even when the stock market is weak.
Find Dividend-Paying Stocks Among the Mid-Cap Companies, Too
Small-cap and mid-cap companies also pay dividends, even while their stock appreciates over time. There's a common misconception among investors that dividend-paying stocks are not great growth stocks. Walmart, WMT, has been paying dividends every year since 1974 when it was still a small-cap company, while over the same period its stock gains made investors wealthy. Occidental Petroleum, Teva Pharmaceutical, EOG Resources, Tanger Factory Outlet Centers, and Potash Corp are other mid-cap companies that paid dividends while they grew.
Use Dividend Reinvestment Plans, DRIP, to Boost Yields
You can reinvest your dividends in more shares of company stock to see your compounded earnings grow faster. Many companies offer a dividend reinvestment plan, DRIP, where your dividends are automatically used to buy more shares of their stock. And more shares of stock mean more dividends for you.
The Dividend Payout Ratio is a Guide to Safer Dividends
To choose companies that can sustain dividend payments, one of the criteria is the dividend payout ratio. It is computed as the dividend per share divided by the earnings per share, EPS. Your investment is safer when a company has a low dividend payout ratio, so that most of the profits are retained for business expansion. A low payout ratio also means the company has plenty of room to raise the dividend. If a company has a high dividend payout ratio, say 70% to 100%, you can usually conclude that profits have been dropping off and the dividend might be cut.
Buy Stocks Before the Ex-Dividend Date
The company pays a dividend to the investor who owns the stock on the day before the ex-dividend date. You receive the dividends even if you own the stock for only 2 days.
Stock Traders Use Dividend Arbitrage for Quick Profits
Traders make quick gains turning over stock shares that pay high dividends. In an arbitrage play, traders buy the shares a few days before the ex-dividend date, and sell the shares shortly afterward, thus earning a nice return for a few days of investing. Because share prices often increase just before the ex-dividend date, traders also buy and turn over shares at this time for a quick profit.
Income Tax on Dividend Income
For 2012, the maximum federal income tax rate on qualified dividends is 15%. However, on December 31, 2012, the 15% tax rate on qualified dividends is scheduled to expire. Unless Congress acts, the dividends you receive after 2012 will be taxable as ordinary income. Consult your tax advisor for the latest changes in this tax law.
5 Ways to Find Stocks that Pay High-Yield Dividends
Where can you find good companies that pay high dividends? Here are 6 ways to find these stocks.
- The stock screener at Bing Finance
- The record of historical dividends at Yahoo Finance
- The S&P index of 500 Dividend Aristocrats
- Find mutual funds that concentrate on dividend-paying stocks. Also many "value-oriented" funds are not allowed to buy stocks that don't pay dividends. Morningstar is a good place to start.
- There are Exchange Traded Funds, ETFs, that invest in dividend stocks. Look at their portfolios for suggestions, or buy the fund and let the experts choose dividend stocks for you.
Companies Just Starting to Pay Dividends can be a Good Investment
Keep an eye out for companies that are just starting to pay dividends. That is a good indicator that management sees a positive outlook and reliable cash flow. Apple, AAPL, began paying a new dividend of $2.65 in summer 2012, for a dividend yield of 1.7% at current stock prices. This places Apple among the top dividend-paying companies with solid earnings and share performance.
Use Bing to Find Good High-Yield Dividend-Paying Stocks
The free stock screener from Bing is a valuable online financial resource. Use the default filter settings to search for stocks with the highest dividend yield. The default settings consider only companies with a market capitalization of at least 2 billion, a return on equity at least equal to the average in their industry, a debt to equity ratio of less than 90% of the industry average, and strong institutional ownership of their stock. Here are the Bing high-yield dividend search results:
|Last Closing Price|| Dividend Yield||5-Year|
|Omega Healthcare OHI||$21.3||7.65%|| 6.90%|
|TransAlta Corp TAC ||$18.95||6.08%||4.50%|
|Markwest Energy Partners MWE||$56.81||5.25%||6.30%|
|PPL Corporation PPL||$27.92||5.11%||3.90%|
|Vectren Corporation VVC||$28.93||4.81%||5.00%|
|H&R Block, Inc. HRB||$16.82||4.71%||3.00%|
|CMS Energy Corp CMS|| $21.85|| 4.37%|| 3.10%|
|Dominion Resources D||$50.69||4.14%||3.90%|
|Waste Management WM||$34.99||4.02%||3.40%|
|Arch Coal Inc ACI||$10.80||3.91%||1.30%|
Use Yahoo to Find the Company's Dividend History
You can research the dividend history of any company at Yahoo Finance. In the Get Quotes box, enter the stock symbol. On the next page of stock info, click Historical Prices. You'll see historical information including quarterly payments of stock dividends. Click the Dividends Only button for your report.
The S&P Dividend Aristocrats Indexes Companies with a History of Paying Dividends
Standard & Poors, S&P, publishes the 500 Dividend Aristocrats, an index to measure the performance of large-cap and blue chip companies that have increased dividends every year for at least 25 consecutive years. It is an excellent resource for investors who want stocks that pay sustainable dividends. The index includes these companies among others:
- Family Dollar Stores Inc, FDO, Consumer Discretionary
- Coca-Cola Co, KO, Consumer Staples
- McCormick & Co, MKC, Consumer Staples
- Brown-Forman Corp B, BF/B, Consumer Staples
- Lowe's Cos Inc, LOW, Consumer Discretionary
- Colgate-Palmolive Co, CL, Consumer Staples
- Abbott Laboratories, ABT, Health Care
- PepsiCo Inc, PEP, Consumer Staples
- Ecolab Inc, ECL, Materials
- Hormel Foods Corp, HRL, Consumer Staples
Suggestions for High-Yield Dividend Paying Companies
Other companies that investors choose for their dividend payments are:
3M Company, MMM, diversified consumer
Abbott Laboratories, ABT, Health Care
Air Products & Chemicals, APD, Materials
AFLAC Inc, AFL, Insurance
Archer-Daniels-Midland, ADM, Consumer Staples
AT&T, T, the phone company
Automatic Data Processing, ADP, Information Technology
C.R. Bard, BCR, Health Care
Becton, Dickinson, BDX, Health Care
Chubb Corp, CB, Insurance
Clorox Co, CLX, Consumer Staples
Dover Corp, DOV, Industrials
Emerson Electric, EMR, Industrials
Family Dollar Stores, FDO, Consumer Discretionary
Grainger (W.W.), GWW, Industrials
Intel, INTC, integrated circuits and one of the few tech companies that pay dividends
Johnson & Johnson, JNJ, health care products
Kraft, KFT, food and beverages company
Lowe's Cos, LOW, Consumer Discretionary
McDonald's, MCD, restaurant chain
McGraw-Hill Companies, MHP, Consumer Discretionary
Nucor, NUE, steel manufacturer
Occidental Petroleum, OXY, with its substantial oil reserves
Procter & Gamble, PG, Consumer Staples
Questar Corp, STR, Utilities
Sherwin-Williams, SHW, Consumer Discretionary
Sigma-Aldrich, SIAL, Materials
Stanley Works, SWK, Consumer Discretionary
Target Corp, TGT, Consumer Discretionary
VF Corp, VFC, Consumer Discretionary
Walgreen Co, WAG, Consumer Staples
Wal-Mart Stores, WMT, Consumer Staples
Waste Management, WM, steady waste disposal company
Exxon Mobil, XOM, Energy
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