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Before we explore the best stocks for dividends let’s look at a couple of different strategies.
Also get the disclaimer out of the way: These are not recommendations. Do your own research into these companies before you buy any of them. If you are buying them you might build an income stream but also you might lose all your money. You’ve been warned.
Dividend Income investing
Dividend income investing is popular for people that want to maximize additional income and don’t mind doing a little extra research maintaining it.
Your main goal is to maximize your dividend income so look for companies that have the highest dividend yield.
If you can find companies with a lower dividend payout ratio even better because they can afford to keep paying their dividends.
Let’s say your goal is to have an extra $10,000 a year of passive dividend income.
If you have $200,000 invested into stocks that give you an average dividend of 5%, you’ll get your extra $10,000 every year.
That extra $10,000 coming in every year might make a big difference to your quality of life.
As you’ll see in the table below some stocks currently offer much higher rates than 5%.
Top 10 Dividend Yields as of August 2019:
Now, if you don’t want to do any research you can just go pick your favorite ETF and buy the market. Don’t pull out when the market crashes, buy more and wait for the economy to go back to normal. Although, you probably wouldn’t be on this website if that was your plan.
Last recession everyone was talking about the “New Normal.” If there is a “New Normal” and all stock prices are stuck in the gutter we have much bigger problems to deal with. (Like businesses not making any money.)
If you’re young and have time to watch your shares grow and want to pick the companies you invest in try Dividend Growth Investing.
Dividend Growth Investing
Dividend growth investing is for people with time to leave their money in the market to work for them.
If you are in your 20s or early 30s and you never plan on selling, this is a strategy to consider.
Basically you want to buy companies that annually raise their dividends.
The list of companies that have raised their dividends for 50 straight years are called Dividend Kings and those that have a 25 year streak in the S&P 500 are called Dividend Aristocrats.
If you’re strictly looking for dividend growth, here are the top 10 companies in terms of average dividend growth over the last 5 years:
Top 10 Dividend Growth Rates as of August 2019:
|Symbol||Type||Yield||Dividend Growth Rate|
In this article you will learn:
- How the Market Works
- What is Dividend Income Investing
- Dividend Growth Investing
- The Dividend Kings List
- The Dividend Aristocrats List
- Portfolio Construction
Have you ever wished that you owned Apple or Amazon or Disney? Not had to actually run the company, just own it and let the CEOs do their job.
When you buy stock in a company you become part owner of that business.
The stock market is a group of individual stocks.
Stocks belong to different indexes, such as the Dow, Nasdaq or S&P 500 for example.
When you hear on the news that the market is up or down they are referring to a group of stocks as a whole.
Individual stocks or shares within the market can move up or down without being tied to the price movement of the whole index.
The price you see next to a stock ticker symbol is the current price for that share of the business.
The process of buying a stock is a little bit like buying something on EBay. You make your bid and if someone is selling for that price- you’re the new owner.
When analysts look at a business and they expect them to do better in the future (and therefore the business will be worth more) their stock price goes up.
If the business is expected to do worse their price goes down.
A word on index funds
You can buy an index fund that owns a bit of the whole market and your investment will track the market.
That is what a lot of personal finance specialists will recommend.
It’s the easy way to get started investing your money in the market.
My problem with it is that people don’t treat it as investing in businesses.
Even though they are.
They treat it as another way to grow their money. Which isn’t entirely wrong.
Here’s the difference:
If you buy the market because it’s smarter and easier and will make you more money in the long run.
You’re only in it for the money.
I buy a bunch of shares in Apple or Amazon.
I’m in it because I believe in the value that Apple or Amazon provides.
We have another 2008 style crash.
You’re probably selling all your money at the bottom because all of a sudden this investment doesn’t work anymore.
You’ll wait until the market does better to think about putting your money back in.
I see that Apple or Amazon are still making bank. I don’t have to believe in the whole market, I have faith in Apple or Amazon.
Instead of pulling my money out when stock prices are low I go and buy a bunch more.
When the economy goes back to normal and you’re considering index fund investing again I’ve already made a bunch of money by averaging my cost down.
This could work for index investing too but you have to believe in the market and that the economy will come back. If not you’ll sell when prices are low and buy them back after they’ve raised back up. (This is what most people end up doing.)
I own individual stocks because I like thinking of myself as a partial owner of a company like Apple or Disney.
I enjoy doing the research and putting my money to work.
If you want to play it safer but still want to pick individual companies, look into mature companies that offer a dividend and have grown their dividend yearly for several years.
Dividend income investing
When a company makes profits they decide to either reinvest it back into the business or to take a portion of that money and pay the shareholders.
This payment is called a dividend.
One method of investing is to focus on maximizing your dividend income.
Companies like telecoms, utilities and REITs are examples of companies that tend to have consistent and high dividend rates.
Take a look at the companies mentioned above. They all offer high dividend rates.
Dividend growth investing
If you are interested in receiving dividends but have a long time to let your stocks grow consider dividend growth investing.
A Dividend Growth Rate is a percentage that a company annually raises their dividend.
You will receive an income from your companies that generally starts smaller and tends to grow over time.
Investopedia has a good dividend calculator where you can punch in a company’s current dividend, assumed rate of dividend growth, how many years you would like to reinvest your dividends, initial investment and monthly contributions.
Quick example: If you invest 10,000 into a company that has an annual dividend growth rate of 3%, add $500 each month and reinvest your money for 30 years you will have roughly $482,000 NOT counting any increase in share price. Your money will also be earning about $35,000 a year for you.
Set up your brokerage account to automatically reinvest dividends received if you don’t need the money right away and believe in the company.
If you’re investing just for highest returns it might be smart to take the money.
You will take advantage of compound interest in the number of shares you own.
Soon enough your shares owned will automatically purchase new whole shares for you.
Dividend Kings are companies that have paid and raised their dividends for the last 50 years.
Dividend Aristocrats are companies in the S&P 500 that have paid and raised their dividends for the last 25 years.
When making your portfolio it helps to think about it on a macro level and a micro level.
You can find out the sector a company is in by looking at the category in your brokers website or through investing research companies like Morningstar.
Ideally you want to weigh your stock portfolio based on sector.
That way if one sector isn’t doing well in the economy it only affects a portion of your stocks.
The sectors the company can belong to are:
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Telecommunication Services
- Real Estate
- Defense & Aerospace
If you are a more conservative investor hold more utilities, defense, consumer staples and telecoms in your portfolio.
If you are being more aggressive buy more in the Consumer Discretionary, Financials, Technology, and Pharmaceuticals categories.
You can also take a more balanced approach and equally weigh all sectors.
Businesses with a Moat
Warren Buffet talks about investing in businesses with a Moat.
A business with a Moat is a company that has an advantage that is hard to replicate or in a market that is difficult to enter.
Think of companies that essentially have a monopoly on a good or service.
Coca-Cola has a Moat because their recipe is a secret. No one is able to copy them.
A pharmaceutical company has a Moat while they have a patent on a drug.
Boeing has a moat because it is very difficult to start an airline manufacturing business.
Verizon has a moat because of their network. Even if a smaller cell phone company comes in to offer cheaper prices on your monthly mobile bill, they still have to pay one of the bigger companies to run services on the larger network.
Incorporating Value Investing
One way to make more money through investing is to incorporate ideas of value investing when looking for dividend stocks.
One way to figure out if a stock is in sale is to look at their percentage yield.
Go through your list of stocks you’re interested in and look at its current dividend yield.
Compare that to their average dividend yield.
If they are currently offering a higher percentage, the stock is on sale.
If a stock is on sale, try to figure out why they are on sale.
Is it a temporary drop in the stock price or do they have long term problems?
One example that has been in the news a lot this year is Boeing.
Boeing has a lot of orders on their planes but also has a problem with keeping these new planes in the air.
Is it a software or technical issue that can be figured out or is it a deeper problem like a managerial and quality issue?
Long term, realistically, Boeing is a profitable company. That’s one example of a business with a great moat. Not too many companies can just start making airplanes.
But if it is a deeper problem (like quality of management) it might take years for them to turn it around and get back to making a quality product and get the orders for new planes flowing again.
If you’re close to retiring or just need the money sooner you might not want to wait for Boeing management to turn it around.
I borrowed this rule of thumb from a Seeking Alpha user that goes by the name Chowder.
Add up the current dividend yield percentage plus the average dividend growth.
For most sectors if this number is higher than 12 you have a candidate.
In sectors like utilities and telecoms that do not have a ton of dividend growth if the number adds up to 8 or higher you have a candidate.
Dividend Discount Formula: Gordon Growth Model
One way to determine the current price of a stock based on dividends is called the Gordon Growth Model.
Price = Current Dividend in Dollars / (current rate – dividend growth rate)
Business dividend track record
The website Tessellation tracks companies that have grown their dividend for a streak of years throughout history.
As you chance higher dividend growth the likelihood of a pause or cut of the dividend rises.
Only 4 companies in the history of the stock market, Air Products & Chemicals, Coca-Cola, Johnson & Johnson, and McCormick have sustained dividend growth of 5% every year over 30 years.
There have been 71 companies that have sustained 5% growth over at least 10 years.
That means out of the 71 companies that make it to 10 years, only 5.5% of those will sustain that performance for 30 years.
How do you pick the right companies at this level when there’s only a 5% chance of getting it right?
What makes it harder is you might now know if you got the answer right for another 20 years!
If you look a couple steps higher at companies that have sustained at least 3% growth over 30 years you have 14 to choose from (including the 4 that have hit 5%.)
There have been 37 companies that have sustained 3% growth over 20 years. So if history continues there is a 38% chance your company will continue performance over 30 total years.
Play the percentages.
What are your criteria for selling a stock?
You can buy and hold forever.
If you are relying on dividend income to live on and one of your companies cuts their dividend, it might make sense to sell those shares and move your money to another dividend stock.
If you are taking a dividend growth strategy, how long do you plan to reinvest dividends?
Do you wait until you’re 65? Or maybe when you’re making a yearly dividend income that can replace half your job’s income?
Think about the businesses you believe will still be around in 50 years.
How important is the price you pay today? It certainly helps maximize profits, but what provides returns in the long run is picking the right companies.
Start with your investing goals.
From there you can figure out an investing strategy and an exit plan.
There is a lot of research to do before jumping in and buying shares in a company.
Don’t let that stop you.
If you want your money to work for you deploy it intelligently.
If you would like to dive deeper into specifics on how to get started with Dividend Investing check out my course and learn how to make $1000 passive income every year.