Dividend stocks can be a great way to gain exposure to the long-term growth potential of equities while still receiving a steady source of income. Here, we provide a quick list of the five stocks with the highest dividend, explain what dividends are, and reveal how to pick dividend stocks.
Please note we do not recommend any stocks specifically. Indeed, we are underweight equities in our Asset Allocation report while remaining defensive in our equity portfolio.
Here are the top dividend stocks that you can currently buy, listed in order of their yield.
- Ares Capital (ARES)
Ares Capital is a global alternative investment manager operating in the credit, private equity and real estate markets. The dividend yield is 10.48%.
- Energy Transfer (ET)
Energy Transfer, as the name suggests, owns various energy-based assets. Its current yield is 9.56%.
- Altria Group (MO)
Altria is one of the largest producers of tobacco and tobacco products. It currently has a yield of 8.06%.
- Hess Midstream Partners (HESM)
Hess Midstream Partners owns various oil, gas, and water assets. It currently has a yield of 8.06%.
- EOG Resources (EOG)
EOG Resources is another energy company primarily involved in oil and gas exploration. It has a yield of 2.85% currently. However, it has a storied history of large dividend payments and it is possible that it will be much higher in the future.
What Is a Stock Dividend? (for Beginner Investors)
A dividend is a payment made by a company to its shareholders. It is usually in the form of cash, but can also be in the form of additional shares of the company’s stock. Dividends are typically paid out of a company’s profits and are a way for the company to distribute some of its earnings to its shareholders.
Pros of Dividend Investing
Here are the main pros of investing in dividend stocks:
- Dividends allow you to earn passive income. Dividends are issued on a regular basis, such as quarterly or annually, creating a reliable stream of income.
- Dividends are the main way to profit from equities without selling the stock.
- Dividends may help offset falling stock prices.
- Many companies also have dividend reinvestment plans that allow stockholders to buy more shares in the company from their dividend income.
- Most regular dividend payers do not vary their dividend payment amounts greatly. The dividends usually increase at a constant rate.
- Dividend-paying stocks are usually companies in their mature phase, meaning that they are generally less risky compared to growth stocks. Considering that the semiconductor sector (along with most of the tech sector) is looking vulnerable, defensive stocks with a strong history of dividend payouts may make more sense now.
Cons of Dividend Investing
Here are a few disadvantages of investing in high-dividend stocks:
- Since dividend stocks are mature companies, the chances of large gains in stock price may be lower compared to companies that focus on growth.
- Dividends are not guaranteed. Companies can reduce or eliminate dividends if they perform poorly.
- A high dividend yield may indicate that the company is paying out a large portion of its profits in the form of dividends, leaving less money available for reinvestment in the business or for other purposes such as debt reduction or share buybacks. This could limit the company’s growth potential and ultimately harm its long-term prospects.
- High dividend yields can attract income-oriented investors, which can result in the stock being overvalued and potentially vulnerable to a sharp decline if market conditions change or if the company’s earnings disappoint
Investors should not focus solely on a stock’s dividend yield and should also consider other factors such as the company’s financial health, growth prospects, and overall valuation before making an investment decision.
Types of Dividend
Overall, there are four types of dividends that stocks can pay out. As for the stocks themselves, some stocks become known as dividend aristocrats by meeting certain criteria. Usually, dividend aristocrats are companies that have paid and raised dividends for at least 25 years.
Here are the four categories of dividend payouts:
This is the most common type of dividend. As the name suggests, cash is transferred to the owner of the stock, usually at the end of every quarter (sometimes on a semi-annual or annual basis).
Occasionally, the company may also offer a special dividend in the form of cash. This is done after a certain event, such as the sale of a subsidiary or when a company has accumulated large cash reserves.
Stock dividends hand over the payout in the form of company stock. The major advantage of a stock dividend is that it is not taxed until the shareholder sells the stock. But since everybody has the same percentage of shares in the company, there is a chance of a fall in the stock price due to dilution.
Property dividends are not that common. On the rare occasions that they are issued, shareholders are granted assets or property by the company.
A liquidating dividend is a payment made to shareholders when a company is liquidating its assets or going out of business. This type of dividend is usually a return of capital to shareholders rather than a distribution of earnings.
How to Choose Dividend Stocks?
Like purchasing any other equity, dividend stocks must be chosen with care and after the necessary due diligence. There are many dividend stocks, including stocks that pay monthly dividends (but they are not necessarily better). Here are certain factors that can be used to gauge dividend stocks. Remember that before you do this, you should first make sure that the company fundamentals are solid.
If the company does not have an advantage over its competitors, it should be avoided. This is true even for companies that pay large dividends. Even if they are paying handsomely right now, chances are that they won’t be able to maintain it if its profits are eroded.
Remember that safe dividend stocks are always preferable to riskier bets. Dividends are all about the long-term, and you should be willing to sacrifice a small amount of the profit for the safety of capital.
Good Dividend History
It is best to take a look at how the company’s dividend has fared throughout the years. If the company has a long history of increasing dividends, chances are that it will continue this trend.
Pay special attention to how the company’s dividend fared during recessions. The hallmark of the best long-term dividend stocks is that they manage to keep increasing their dividend even through bad times.
The payout ratio is the measure of just how much of its income the company set aside for dividends. It is calculated by dividing the total dividends in any given year by the total income.
There is no exact rule of what the payout ratio should be. However, those looking to build a dividend portfolio should aim for stocks with a payout ratio between 40-60%.
It is also important to remember that one-time special dividends should not be included in this ratio. This is because these dividends are not regular and can skew the ratio by a large amount.
How To Invest In Dividend Stocks?
There are two ways to invest in dividend stocks. One is to pick stocks yourself, and the other is through dividend funds. Finding the best dividend funds is not that difficult, as investors can simply opt for a fund with medium risk and the best possible long-term track record.
Picking stocks, however, is considerably more difficult. You have your pick from affordable dividend stocks all the way to expensive options. Here is how you can begin investing in dividend stocks:
- Find a dividend-paying stock or fund that matches your risk appetite and investing goals.
- Evaluate all the aforementioned points to make sure that they will be a good fit for your portfolio.
- Decide just how much of your portfolio will comprise the specific stock/fund.
- Head to your brokerage and purchase the corresponding number of shares.
- Make sure to appropriately diversify your portfolio and repeat the steps outlined here for each stock/fund.
How Are Dividends Taxed?
Dividends are taxed depending on the type of dividend. A stock dividend is not taxed until the stock has been sold, which is when the capital gains tax is applied to the value of the stock. The same concept is also applied to property dividends, as they are only taxed when they have been liquidated. However, the tax rate for property dividends and stock dividends may be different in your jurisdiction.
For cash payouts, the dividend tax rate is the same as the income tax. This is because cash dividends are considered additional income. These dividends are taxed when you file your annual returns.
Lastly, scrip dividends are taxed in the year that the amount is deposited to your account.
Dividend stocks can be a great addition to your portfolio under the right conditions. Even though we are currently underweighting equities in our asset allocation, the right kind of dividend stocks could offer diversification benefits depending on your other allocations and a regular source of income. Dividend stocks can also serve as an indicator of a company’s financial health and future prospects.
Does Amazon Stock Pay Dividends?
Yes, Amazon pays a quarterly dividend. Its dividend yield at the time of writing is 0.19%.
Does Apple Stock Pay Dividends?
Yes, Apple pays a quarterly dividend. Its dividend yield at the time of writing is 0.56%.
What Are Dividend Aristocrats?
Dividend aristocrats are stocks that have a long history of increasing and consistent dividends. To qualify, stocks on the S&P 500 need to have paid and increased their dividend for at least 25 years.
Do All Stocks Pay Dividends?
Not all stocks pay dividends. Only certain stocks pay dividends, and even they are not obligated to do so regularly.
What Is Dividend Yield?
The dividend yield is the annual sum of dividend amounts divided by stock price. It essentially shows the return that investors get through the payouts.