Investing in dividend stocks can be a powerful strategy for boosting your income, especially during times of high inflation or economic uncertainty. Dividend stocks provide regular passive income from some of the strongest companies in the market. Here’s a guide to investing in dividend stocks and a list of 10 top dividend stocks to consider for your portfolio.
How to invest in dividend stocks
John D. Rockefeller Sr. once said that the joy of seeing his dividends roll in was unmatched. Curious to experience this for yourself? To get started, you’ll need to buy shares in companies, mutual funds, or ETFs that distribute dividends.
1. Investing in Individual Companies:
One way to earn dividends is by purchasing stock in a company that pays them. Many companies have a strong track record of increasing their dividends over time. For instance, Walmart recently raised its annual dividend for the 51st consecutive year. Before investing, it’s essential to assess the company’s financial health and reliability.
To calculate a company’s dividend yield, divide the annual dividend per share by the stock price. This percentage helps you compare opportunities and determine the best value for your money.
2. High-Yield Mutual Funds and ETFs:
For a more diversified approach, consider high-dividend mutual funds and ETFs. These funds generally include companies with above-average dividend yields and can provide higher income than a typical portfolio. For example, the Vanguard High Dividend Yield ETF (VYM) includes consistent dividend payers like JPMorgan Chase and Johnson & Johnson and has a low annual expense ratio of 0.06%.
3. Dividend-Appreciation Funds and ETFs:
Another option is to invest in funds that focus on companies with a history of increasing their dividend payments over time. Although these funds may offer lower yields compared to those focused solely on high payouts, they often provide greater stock price appreciation in the long run. Funds in this category may include companies like Microsoft, Walmart, and Apple.
Since 1960, reinvested dividends have contributed 69% of the total return of the S&P 500 index, according to a 2023 Hartford Funds study.
Dividend stock investing strategies
When investing in dividend stocks, consider these strategies:
1. Dividend Yield: Buy stocks or funds with high current dividend yields. These companies may be undervalued or facing business challenges that have temporarily increased their dividend yield. However, be cautious as high yields can sometimes signal potential dividend cuts or financial difficulties.
2. Dividend Growth: Invest in companies or funds that have consistently increased their dividends. While these stocks may offer lower yields, they usually represent healthier businesses with a track record of growing earnings.
Top 10 Dividend Stocks
Here are ten high-yield dividend stocks to consider:
1. Altria (MO)
- Dividend yield: 8.3%
- Annual dividend: $3.92
Altria is known for its Marlboro cigarettes and has a significant stake in Anheuser-Busch InBev.
2. Verizon Communications (VZ)
- Dividend yield: 6.4%
- Annual dividend: $2.66
Verizon is a major player in communication services and technology.
3. AT&T (T)
- Dividend yield: 5.9%
- Annual dividend: $1.11
AT&T has recently reduced its dividend as it focuses on 5G and debt reduction.
4. Pfizer (PFE)
- Dividend yield: 5.9%
- Annual dividend: $1.68
Pfizer is a global pharmaceutical company with a broad range of medical products.
5. Franklin Resources (BEN)
- Dividend yield: 5.4%
- Annual dividend: $1.24
A global investment management firm managing around $1.4 trillion in assets.
6. Dow Inc. (DOW)
- Dividend yield: 5.3%
- Annual dividend: $2.80
Dow is involved in the production of chemicals used in various industries.
7. Kraft Heinz (KHC)
- Dividend yield: 5.0%
- Annual dividend: $1.60
Known for its wide array of food and beverage brands.
8. Philip Morris International (PM)
- Dividend yield: 5.0%
- Annual dividend: $5.20
A leading tobacco company with a growing focus on smoke-free products.
9. Ford Motor Co. (F)
- Dividend yield: 4.5%
- Annual dividend: $0.60
Ford is a major automaker with a substantial global market presence.
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10. CME Group (CME)
- Dividend yield: 4.4%
- Annual dividend: $8.65
Operates derivatives exchanges and market data services.
Dividend stocks vs. dividend funds
Deciding between dividend stocks and dividend funds involves weighing individual company investments against diversified options. Dividend stocks are shares in companies that pay dividends, while dividend funds or ETFs are collections of dividend-paying stocks.
Benefits of Funds:
- Diversification across many companies, reducing individual stock risk.
Benefits of Individual Stocks:
- Potential for higher returns if you choose stocks with strong fundamentals and do thorough research.
For most investors, dividend funds offer a safer, more diversified approach. However, experienced investors who prefer in-depth company analysis might find higher returns with select individual stocks.
Final Thoughts
Dividend stocks and funds can enhance your income portfolio. Remember, if you hold these investments in a taxable account, you’ll owe taxes on the dividends you receive. To avoid taxes, consider investing through a tax-advantaged account like an IRA or 401(k). Always research dividend stocks carefully, as some companies with high payouts may face challenges that could impact their dividends.