How to invest in dividend stocks
Building a portfolio of individual dividend stocks takes time and effort, but for many investors it's worth it. Here’s how to buy a dividend stock:
1. Find a dividend-paying stock. You can screen for stocks that pay dividends on many financial sites, as well as on your online broker's website. We've also included a list of high-dividend stocks below.
2. Evaluate the stock. To look under the hood of a high-dividend stock, start by comparing the dividend yields among its peers. If a company’s dividend yield is much higher than that of similar companies, it could be a red flag. At the very least, it’s worth additional research into the company and the safety of the dividend.
Then look at the stock’s payout ratio, which tells you how much of the company’s income is going toward dividends. A payout ratio that is too high — generally above 80%, though it can vary by industry — means the company is putting a large percentage of its income into paying dividends. In some cases dividend payout ratios can top 100%, meaning the company may be going into debt to pay out dividends.
3. Decide how much stock you want to buy. You need diversification if you’re buying individual stocks, so you’ll need to determine what percent of your portfolio goes into each stock. For example, you’re buying 20 stocks, you could put 5% of your portfolio in each. However, if the stock is riskier, you might want to buy less of it and put more of your money toward safer choices. If you're going to reinvest your dividends, you'll need to recalculate your cost basis — the amount you originally paid to purchase the stock.
The No. 1 consideration in buying a dividend stock is the safety of its dividend. Dividend yields over 4% should be carefully scrutinized; those over 10% tread firmly into risky territory. Among other things, a too-high dividend yield can indicate the payout is unsustainable, or that investors are selling the stock, driving down its share price and increasing the dividend yield as a result.
Another thing to keep in mind is that dividends in taxable brokerage accounts cause taxes to be realized in the year the dividends occur, unlike stocks that do not pay dividends whose taxation primary occurs when the stock is sold. For investors with taxable accounts and in high income brackets, dividends stock might not be as tax efficient as other options.
10 high-dividend stocks
Below is a list of 10 of the highest-dividend stocks headquartered in the U.S., ordered by annual dividend yield. This list also takes into account the 5-year average dividend growth rate.
| Symbol | Company Name | Dividend Yield |
|---|---|---|
| SAR | Saratoga Investment Corp. | 11.34% |
| CALM | Cal Maine Foods Inc. | 10.22% |
| DVN | Devon Energy Corp. | 10.05% |
| CTRA | Coterra Energy Inc. | 8.37% |
| KEY | KeyCorp. | 8.34% |
| CMA | Comerica Inc. | 7.79% |
| WU | Western Union Co. | 7.74% |
| TSQ | Townsquare Media Inc. | 7.69% |
| EPM | Evolution Petroleum Corp. | 7.52% |
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Originally published on NerdWallet.com
