If you are looking for an investment option that offers you passive income, then Dividend stocks are ideal for you. A dividend-paying company usually is established and has stable earnings over the years. These companies have a robust record of distributing continuous high dividends to their shareholders in the form of cash or offering additional stock. Sounds interesting, isn’t it? In this blog, we will guide you on how to invest in dividends stocks and list a few best dividend stocks in 2023.
You will find hundreds and thousands of individual stocks, which may make you perplexed on deciding the sustainability of a company's ability to pay for dividends, and its potential growth. In such circumstances, you can utilize the dividend payout ratio to calculate the total dividends offered by that company divided by its net income.
DPR enables investors to determine how much net income of the company is allocated to dividends, compared to how much they retain to complete business operations. If a company exceeds 100% or is negative, that means the company is borrowing money to offer dividends to its shareholders. In such cases, dividends tend to be at high risk of being suspended.
Let us walk you through different factors involved in determining the best dividend stocks for 2023, and solve your concerns like how to buy high dividend stocks.
- What are high-dividend stocks?
- Individual dividend stocks vs Dividend funds
- How to invest in dividend stocks?
- Top 9 best dividends stocks of 2023 to consider
- Analyze your dividends stocks 3 ratio types
- How to research dividend stocks?
- Perks of investing in best dividend stocks
- Bottom Line
What are High-Dividend Stocks?
High-dividend stocks can be the right investment decision if you expect a regular income. Join us in understanding dividend stocks.
High dividend stocks are stocks that tend to distribute a particular portion of a company's earnings from profits to investors in the form of dividend stocks. Though, most USA-based companies’ stock payout is provided to investors regularly, usually every quarter.
The top or well-established companies would increase their payouts over the years, which enables investors to build an annuity-like cash stream. However, investors can opt to reinvest in other dividends if they do not need cash streams immediately.
Since the dividend stocks are provided by the companies that are established, this will help you add stability to your investment portfolio. This is one of the main reasons why dividend stocks are categorized under low-risk investments. Note that, dividend stocks calculated by S&P 500 Aristocrats Index, are 5% as per the past year vs 10% of Russell 1000 gain.
Key considerations of investing in Dividends
- Dividends will be offered by companies that distribute a portion of their net income to their shareholders regularly.
- The dividend yield is the ratio as termed in percentage tends to compare the annual amount of dividend with the stock price.
- Dividend yield rates fluctuate as per the status of stock price.
- Major dividends are paid quarterly, but a few companies can payout their distributions to shareholders semiannually or annually.
- While dividend yields are valuable, as an investor you must research additional information about the company before you buy dividend stocks.
Individual Dividend Stocks vs Dividend Funds
Before you shortlist the best dividend stocks in 2023, you must understand two distinct methods for investing in dividends. One of the most popular ways is through purchasing mutual funds or exchange-traded funds that hold dividend stocks or you can invest in individual dividend stocks.
Index funds or ETF dividends offer investors access to select multiple options of stocks with just one investment. This means, with one transaction you can seamlessly own a portfolio of the best dividend stocks. Later on, these funds pay out dividends to the investors regularly, which you can turn into your regular income or invest in other dividends.
Additionally, dividend funds offer a perk of building instant diversification in your portfolio. For instance if one of the funds that you held cuts or suspends, you can rely on your dividend income through other options.
Reinvesting Individual Dividend Stocks vs Dividend Funds
Whether it is dividend funds or individual dividends, reinvesting in these dividends can improve your return on investment. Dividends tend to increase the return of stock or dividend funds by a few percentage points. For instance, the total annual average of the S&P 500 has been 2% over the year, which is higher than the index's annual change in value.
This difference can add to your portfolio. Using an investment calculator, you will observe a $5000 investment which grows at 6% for 20 years and can grow up to $16,000. Build up overall growth to 8% to include dividends, and your initial $5,000 investment can grow up to $24,000 with a dividend.
Generally, the thumb investment rule states that you must invest the bulk of dividend funds to diversify or grow your portfolio. However, investing directly in individual dividend stocks is also beneficial.
Invest in Individual Dividend Stocks
As an investor, individual dividend stocks demand a lot of effort in terms of research for each stock to determine whether it fits with your portfolio requirements and meets your financial goals. Though, investors who opt for investing in individual dividend stocks can build a customized portfolio that has a probability of offering a higher yield than dividend funds.
Additionally, you will lower your expenses here because ETFs and index funds are more likely to charge annual fees commonly termed as expense ratio to investors.
Read Also:- A Roadmap To Wealth Building Strategies To Gain Profits From Stock Market in The USA
How to Invest in Dividend Stocks?
Building a strong and diversified portfolio with individual dividend stocks can consume a lot of effort, time, and research but for a few investors, this can be an exciting opportunity to earn bumped-up returns. Here’s how you can invest in the best stocks.
Look for a Dividend-Paying Stock
Screen stocks that provide dividend payouts. You can research using a few financial sites, or online brokerage’s website.
Analyze Varied Stocks
To understand the ups and downs of the best dividend stock, initiate your research process by comparing the yields of the stocks. If a company’s dividend yield is much higher than other companies from the same industry or sector can be a red flag. At least, it's worth researching the company and looking for dividend safety.
The next step should be checking out the company’s stock payout ratio, this will help you determine the amount that a company is allocating towards dividends from their net income. If a payout ratio of a company is high for instance 80% indicates that a company is putting a large portion of money into dividends (the percentage can vary from industry).
In other cases, a few companies will payout dividends up to 100%, which means companies can go into debt for paying out dividends to their shareholders in times of downfall or inflation.
Determine How Many Stocks you can Purchase
If you are purchasing individual stocks, then you will need diversification in your portfolio. Deciding what percentage of the portfolio goes into each stock must be your priority. For example, let’s imagine you are buying 20 stocks, you can choose 5% each in your portfolio.
However, if stocks seem riskier, you may want to purchase less of these stocks and invest more in safer options. If you want to Reinvest in dividend stocks then you will have to re-calculate your cost, in terms of the amount that was originally paid to the stocks.
your first consideration is checking dividend safety before purchasing dividend stock. If you see a dividend yield above 4% you must conduct a thorough inspection, and yields above 10% are considered riskier options. When a company or stock offers too high yields, it means that payouts are unsustainable or investors seem to be selling stock which can drive down the stock price and increase dividend yield.
Another important thing to consider is dividend taxable accounts are subject to taxes which will be imposed in the next year when dividends occur to your account, Unlike stocks, which do not pay dividends and taxation primarily occurs only when a particular stock is sold.
For investors who own taxable dividend accounts or have larger income brackets, dividend stock may not be a tax-efficient option compared to other investment options.
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Top 9 Best Dividends Stocks of 2023 to Consider
While there are multiple dividend stocks, we know you are waiting to know the best dividend stocks in 2023. We have listed below the 9 best dividend stocks in the USA, and the list will walk you through the 5-year average dividend growth rate as well.
| Ticker | Company’s Name | Dividend Yield |
| NRT | Northern European Oil Royalty Trust | 20.48% |
| MVO | MV Oil Trust | 18.45% |
| UAN | CVR Partners, LP. | 37.2% |
| BPT | BP Prudhoe Bay Royalty Trust | 19.03% |
| SRV | NXG Cushing Midstream Energy Fund | 13.78% |
| ARLP | Alliance Resource Partners, LP. | 14.98% |
| RWAY | Runway Growth Finance Corp. | 12.62% |
| VOC | VOC Energy Trust | 13.65% |
| NLY | Annaly Capital Management, Inc. | 12.66% |
Are the Above-Listed Dividend Stocks Worth Investing in?
The stocks mentioned above contain higher yields, but do not necessarily mean are the best dividend for any investor. The ideal portfolio differs from person to person, depending on their financial goals and timeline to acquire these targets. Perhaps, many investors are better at purchasing index funds than individual stocks.
It is advised to not invest in dividend stocks only on their high yields because not all high yield indicates good potential growth. Sometimes, falling stock prices can lead to high dividend yield, and a few companies end up going into debt by overspending on their dividend payouts. These companies would then cut off their dividends if they have become unsustainably expensive.
If you are an investor who finds dividend stocks low risk of cutting payouts, then you must conduct your research on Dividend Aristocrats, a group of S&P 500 that have increased dividends year after year for 25 years. Additionally, with higher yield you must conduct a thorough dividend analysis with 3 types of ratios to find the right match of dividend investment.
Analyze your Dividends Stocks 3 Ratio Types
You can make the right decisions on investing with individual dividend stocks by utilizing 3 kinds of ratio types.
Dividend Yield
This type of ratio is beneficial for calculating an annual value for dividends received to a security’s per share market value. Investors can measure dividend yield by dividing the annual dividend per share by the current stock price.
For instance, if a company issues a dividend of $10 annually with a current stock price of $100 it will have a dividend yield of 10%. Investors who are actively looking for high yields can start their research by checking dividends with a certain percentage. Remember, dividend yield shouldn’t be your sole factor in deciding to invest.
Dividend Payout Ratio
As we mentioned above in the blog, DPR will help investors to calculate how much a company is allocating to the dividend payouts from their net income or profit. You can calculate the value of the stock by dividing the dividend price by the company’s net income.
For example, if a company has reported its net income of about $50,000 and paid $15,000 as annual dividends to shareholders, the DPR of the company would be 30% which means the company is paying out 30% to its shareholders from their net income. Any company that pays out less than 50% of its net income is considered stable and mostly has the potential for receiving long-term sustainable returns for investors.
Dividend Coverage Ratio
This type of ratio focuses on calculating how many times a company can pay dividends to shareholders. Investors can measure this ratio by dividing the company's annual earnings per share by the annual dividend per share.
For example, if a company reports $10 million as a net income with a dividend of $2 million to shareholders it means the company has a dividend coverage ratio of 5 times. Ideally, investors find a higher coverage ratio as a favorable option.
How to Research Dividend Stocks?
As we said, high yields are just one of the factors in determining ideal dividend stocks. In addition, higher than average yield can lead you to trouble if a company struggles to make large dividend payments. Let’s have a closer look at other aspects to invest in a safe dividend with greater potential growth.
Dividend Increase
When a company has a continuous robust history of increasing dividends means that the company had stable payouts throughout the economic times while maintaining regular payouts to shareholders and raising the amount.
Great Market Share and Competitive Advantage
This aids companies to maintain the ability to become excellent performers. Advantages can be intellectual property, high barriers to entry, advanced technology, and a recognized company name and brand.
Revenue and Company Growth
Companies that have stability over time are considered ideal options to invest in. Erratic trouble amid the journey may not affect the company's growth or financial results but other aspects can put the company in trouble.
Payout Ratio
A payout ratio of 35% - 55% is considered a healthy ratio in a company. When a company distributes half of its income to dividend payouts it is more likely to be a good performer in the long-term.
Perks of Investing in Dividend Stocks
There are various aspects to determine the best dividend stocks in 2023, dividend offers a few exciting perks as well which attract investors to turn their attention to investing in dividends.
Dividend Reinvestment
Investors can choose to reinvest dividends received back in the company to acquire more stocks. You can join the Dividend reinvestment plan (DRIP) and take advantage of the compound return to build wealth for the long term.
Earn Passive Income
Companies that issue regular dividends mostly distribute payouts quarterly. Which can be a regular passive source of income for investors with cash streams. Also, investors get the advantage of off-setting the price of stock depreciation.
Bottom Line
Dividend stocks are one of the ideal sources of receiving regular passive income. By determining various aspects discussed in the blog with the top dividend individual stock list, you can start your journey by investing in dividends seamlessly.
Frequently Asked Questions
Follow a few steps to invest in dividend stocks
Research: Research and determine companies that have a history of consistent records of distributing dividend payments and have financial stability.
Brokerage Account: Open a brokerage account to start off buying and selling stocks.
Diversification: Build a diversified portfolio that entails various dividend-paying stocks.
Reinvestment: Consider reinvesting dividends to benefit from compounding returns.
Monitor: Regularly monitor the performance of your dividend stocks and make adjustments in your portfolio.
Companies that have consistently paid dividends to their shareholders for over 100 years include
1. Coca-cola
2. Colgate - Palmolive
3. General Mills
4. Chubb
5. Proctor and Gamble
6. ExxonMobil
7. Eli Lilly
