Dividend stocks appeal to many kinds of investors. Most of them are retirees who want to secure their wealth after working. Such stocks are ideal because of their high yields, which in turn provide decent, if not generous, income. If that sounds good to you, come and read what we have to say. This article will give you the best dividend stocks to invest in.
The highest paying dividend stocks offer yield in excess of 4%. If that’s not good enough, know that some of them reach as high as 10%.
Sounds good? We think so too!
However, here’s a little caveat: not all of them are safe. Don’t skip any part of this discussion. Read on!
“High” Dividend Stocks
We can’t just say that a dividend stock pays high without having a proper measure for it. For some, 2% is already high, while most will think that that is still very low.
To cut to the chase, any stock with a dividend yield in excess of 4% is a “high” dividend stock. Why? Find our chart below that shows the US Stock Market Dividend Yield. You’ll see that the stock market’s dividend yield has stayed below 4% during most of the last 25 years. It’s easy to see that dividend stocks reaching pass 4% is “high.”
Let’s focus our attention on another question. Why do other dividend-paying stocks give higher yields? Answers vary.
For instance, a company’s status affects its yield. If a business is already mature, we bet you that it’s dishing out high yields. The business probably has few profitable growth investments it can pursue. The obvious route is to return its cash flows to shareholders.
Sometimes, a company’s structure also requires it to give most of its cash flow to investors. Most of the time, they do that for tax purposes.
In other instances, stocks with high dividends offer large payouts because of financial leverage. They magnify their profits this way.
Hunt for High Yield Stocks
If you’re eager to jump in this kind of investing, the following will help you—big time!
It’s quite easy to spot high yield stocks. They come in many shapes and sizes, and not far in between. Here’s a list of the best places to hunt for high-yield dividend stocks.
Master Limited Partnerships (MLPs)
In the 1980s, the government put it in its head to create MLPs to encourage investment in capital-intensive industries. Most of these are in the energy sector, plus they own expensive, long-lived assets. These assets include pipelines, terminals, and storage tanks. (Imagine a huge storage tank where you store your money.) A big number of such assets help move energy and fuel from one place to another for oil companies.
Why MLPs? They don’t pay any income tax, so they’re free to dish out generous dividends. They give nearly all of their cash flow in cash distributions. This is like corporate dividends, except they are in the MLPs sector. Often, they have fairly predictable earnings.
Real Estate Investment Trusts (REITs)
The 1960s witnessed the birth of REITs. The decision helped America fund the growth of its real estate. It was also tax-efficient!
Remember when we said that some companies offer high paying dividends for tax purposes? This one’s like that. REITs don’t pay any federal income tax. But they must pay out at least 90% of their taxable income as dividends.
REITs have different types. They can be apartments, offices, hotels, nursing homes, storage, and others. They lease out their properties to tenants, making easy money. REITs are like rock stars for their high payout ratios. They also have a quite stable rent cash flow.
Thinking about investing in Real Estate? Check our article about Real Estate Pros and Cons!
Business Development Companies (BDCs)
After the REITs, the 1980s gave birth to BDCs, which are regulated investment companies.
Basically, they are closed-end investment funds very much like REITs. They’re also free of corporate taxes, as long as they pay 90% of their taxable income as dividends.
They come in various forms, but they mainly raise funds from investors and offer loans for mid-market companies. These middle market companies are smaller businesses with non-investment grade credit. A whopping 200, 000 of these businesses lurk out there. Big banks don’t usually lend them growth capital, and that’s where BDCs jump into the picture.
Closed-end Funds (CEFs)
Now these are rather more complex that those mentioned above. CEFs are a type of mutual fund. Shares are traded on a stock exchange. The fund’s portfolio managers manage its assets, and they invest the assets in different securities.
A huge number of CEFs take advantage of leverage to gain more income. They also frequently trade at premiums or discounts to their net asset value. However, they generally depend on investor sentiments.
Monthly Dividend Stocks
If REITs are the rock stars, monthly dividend stocks are the more accessible celebrities for those who hold retirement portfolios. They are popular for their easy payout times, squashing budgeting difficulty down to zero. Not to exaggerate, but there are hundreds of them out there. You just have to remember that most of them are closed-end funds or REITs. And of course, you know that even REITs typically offer high yields.
We can safely say that this one’s a newcomer. YieldCos are pass-through entities. (If you’re not sure what a “pass-through” entity is, they are basically companies free from income tax.)
As a rule, YieldCos buy and manage complete renewable power plants like wind solar, and others. They sell the clean energy to utility companies. Such transactions fall under long-term, fixed-free power purchase agreements.
Warren Buffet’s High Dividend Portfolio
A big slice of publicly-traded stocks (that Mr. Buffet’s Berkshire Hathaway holds) pays dividends. If you have a retirement portfolio, you’ll definitely find them appealing.
Bill Gates’ High Dividend Portfolio
Of course, Mr. Microsoft won’t let Mr. Buffet overshadow him. Come on. Mr. Gates’ investment manager has a huge number of dividend-paying stocks in the palm of its hand.
Exchange-traded Funds (ETFs)
Thousands of ETFs exist, and some of them certainly pay high dividends. You also better check them out if you don’t want to miss anything.
Utilities & Telecoms
Remember when we said that mature companies pay high dividends? Here they are. They are mature, and they have low growth rates. They return the lion’s share of their cash flow to shareholders via dividends. You can almost see them chasing you.
Now that you know where to hunt, it’s time to know what to avoid, just like a good ol’ hunter.
Fair Warning: The Best can be the Riskiest!
If you’re also a movie buff, you probably watch superhero films. You know, those cartoonish dudes like Tony Stark, Steve Rogers, and Bruce Wayne. Cartoonish characters who wear cartoonish clothes, fighting cartoonish villains. One thing you may have noticed: the more powerful they are, the riskier their lives are. This is also true with high-paying dividends. Yes, we know it’s unfortunate. But there it is.
Want to know more about your risk tolerance? Read here: Understanding Risk Tolerance
As a rule, many high-paying dividend stocks sport unique business structures that come with many risks.
For instance, REITs and MLPs distribute almost all of their cash flow. That means they must always raise external capital to grow. What’s external capital? Debt and Equity.
And because they need to do that, they sometimes need to face extra risks, unlike basic corporations. Buying real estate and building pipelines are, to be frank, expensive. What if their access to capital markets becomes restrained? Or more expensive? They will be weak and vulnerable. Rising interest rates or a slumping share price can be a nightmare for them.
Here are a few examples of those dreadful instances:
REITs and MLPs:
Kinder Morgan is the largest pipeline operator in the United States. It also experienced a very mind-bending predicament. We won’t elaborate on that one, but we’ll tell you that it had to slash its dividend by 75%.
This happened in 2015. During that time, the business had seen its outside financing become way too expensive for it to reasonably handle. It found itself trapped between two giant boulders. It had to choose between investing for growth and maintaining its dividend.
Ferellgas is one of the major retail distributors of propane. And through it, we’ll describe why high dividend stocks are risky.
This MLP business has been around for more than 75 years. Up until 1994, it did not fail to pay good dividends. But after that, it slashed more than 80% of its distribution, shocking investors. Why did that happen?
Ferellgas Partners piled debts and debts on top of each other, until it was too much. The idea was to diversify its business, but mild winter stunted propane sales. This eventually led to a cash crunch.
High payout ratios and high financial leverage can increase the risk profile of many high dividend stocks. Even if these companies are stable, they can crumble quickly due to unexpected events.
Moreover, REITs and MLPs rely on capital markets, and they sometimes face regulatory risks. Suppose Congress changed the tax treatment for MLPs, then it’s almost impossible to avoid double taxation.
BDCs and CEFs
BDCs and CEFs are also risky. They use big amounts of financial leverage to increase their income. One mistake is all they need to jeopardize their payouts.
We only need one good example to illustrate this. Come and read what follows.
This company joined the business in 1994. It operates thousands of retail stores, which sell new and used video game hardware and accessories.
GameStop’s stock yields over 6% even if it’s a basic corporation, neither REIT nor MLP. But don’t get impressed yet. The turn of events proved that GameStop was more like a value trap than treasure chest.
In 2016, GameStop’s same store sales plummeted 11%. Of course, its profitability soon followed the plunge. Its management has taken on swelling amounts of debt, trying to gravitate toward more attractive markets. But many believe that there will be a turnaround sooner or later.
If, in the future, good results do not show up, the dividend will be at risk. The value of the whole company will inevitably shrink.
If you plan to gather up these high yield dividend stocks, study. Do your homework. Try to absorb what the company is about. Understand the risks that each high-paying dividend stock entails. If the business uses any element of financial leverage, take more time to consider. They might be value traps.
What Makes High Dividend Stocks Safe?
Let’s use another hunter analogy. A good hunter knows where to hunt, the dangers of the hunt, and what else? A good hunter knows how to make himself safe! That’s what will follow. We got two of the telling pieces of advice to help you secure your safety.
The Golden Rule
Remember that old but gold adage first: never buy something you don’t understand. That’s from Warren Buffet, by the way. Sure enough, you are safe inside your comfort zone. You’re competent in there. So, find a stock that you understand well. This is the golden rule.
Seek more wisdom. Check this out: 9 Things to Know to be a Successful Investor
You ought to grab a pen and a piece of paper, and list these things down. First, learn about the industry where the stock operates in. Second, figure out how much operating leverage the company uses in its business model. Third, check the total financial leverage they use on the balance sheet. Fourth, assess the size of the company. And lastly, find the current valuation multiple.
Once you have ticked those, you already have ample information to gauge the riskiness or safety level of your stock.
The Best Dividend Stocks
In the beginning of this article, we promised to tell you the best dividend stocks to invest in. Now you know where to hunt such stocks and how to distance yourself from risky ones. We believe it’s time for us to fulfill that promise. The following are some of the best (and safest) dividend stocks you can invest in.
This business is in the Food Processing industry and it falls under the Consumer Staples Sector. It has a dividend yield of 3.6%. A few points short of 4%. But it’s extremely safe.
Additionally, General Mills has a diversified sales mix of packed meals, cereal, snacks, and more. To make you more familiar with them, their key brands include Cheerios, Yoplait, FiberOne and Annie’s. Ringing any bells?
General Mills mainly sells its products to large retailers. Walmart is one of those. Close to 75% of their sales are in the US. More good news: the company’s expanding its product categories.
This business has been around for a hundred years. Take that. Unlike latecomers, this granddaddy-ish company benefits from its scale. Its long-term distribution relationships, brands, and long-time marketing all contribute to General Mills’ strength.
If the company manages to adapt to the ever-changing customer preferences, it’s likely to retain its staying-power. Another hundred years doesn’t sound so bad, does it?
To hype you up even more: the business has been paying uninterrupted dividends for more than 115 years. It has solid cash flow generation, and its payout ratio is almost 65%. It’s hard to imagine it losing firm footing on the market.
This company makes the cut for the 4% dividend yield, and you probably have heard about it many times before. It is one of the global pharmaceutical titans around, with revenues higher than $50 billion.
Pfizer has two business segments.
The first one’s Innovative Health, which produces patented medicines for therapeutic areas. These include medicine, vaccines, and rare diseases. It’s 60% of sales and 62% of profits.
The second one’s Essential Health, where we can find the company’s legacy medications that will soon lose patent protections. This part of Pfizer’s portfolio is nicely diversified, and accounts for less than 1% of sales. That means they can avoid surprise slumps in overall results.
This should be a good dividend stock to invest in because the health care sector promises a bright future. A variety of factors increase the demand for this company’s products in the long run.
Almost ten years ago, the company cut its dividend. But Pfizer redeemed itself and rewarded investors with a whopping 9.4% annual dividend growth rate over the last 20 years. It also paid and increased dividends for more than 30 years. We can safely say that that cut in 2009—it’s only a bad little memory now. We’re in clear coast here.
It has a payout ratio of 50%. That’s very healthy. The dividend stream is safe today, and there isn’t any indication that that will soon change. Pfizer increased its quarterly dividend by 6% in December 2017. That’s the similar pattern…for five years! What are you waiting for?
Verizon Communications Inc.
Verizon is a really good choice. With its 4.7% dividend yield, it’s one of the most talked-about businesses in the Diversified Communications Services industry. It’s also the largest wireless services provider in the US. You know the basics—4G LTE coverage to over 98% of the country’s population.
In 2016, the business took the crown and became the most profitable company in the telecommunications industry—in the world. Verizon tinkers with two general businesses, the wireless operations and wireline operations. It also expands into promising areas like the Internet of Things and digital media.
Overall, the company is poised for another couple of years of expansion and enhancements. However, spectrum licenses cost huge fortunes and they’re not always available. Verizon also needs to pour money to new technologies, like its 5G wireless tech development.
Still, Verizon’s high dividend is still very much alive and kicking. It has paid uninterrupted dividends for three decades, increasing them for 11 years in a row. Plus, it recently announced a $10 billion cost savings plan. This plan promises to give the company’s dividend enough firepower until 2022.
Ventas Inc fall under the Real Estate sector in the Healthcare industry. With its dividend yield 6.1%, it easily overtakes the previous companies we have mentioned.
The company is a healthcare real estate investment trust, investing in locations in the US, Canada, and the UK. It’s also one of the largest healthcare REITs in America.
Why is it a good idea to invest in here? What makes it safe? Consider: the aging population demands better healthcare and senior living services. Through 2024, healthcare spending will probably grow 5.8%, according to experts.
Additionally, it has a huge potential for growth in the US. Less than 15% of American medical assets are under medical REITs today. And if you compare it to other industries, healthcare REITs control a smaller percentage of real estate assets.
In 1999, it went public, and has since paid uninterrupted dividends. Sounds good? Here’s more: it has increased its dividend 8% per year since 2001.
Main Street Capital Corporation
We know you know this: Main Street Capital has a higher dividend yield than Ventas. It’s 6.3%, well above our 4% baseline. It’s in the SBIC & Commercial industry, under the Finance sector.
Texas saw the birth of Main Street Capital in the mid-1990s. It provides long-term debt and equity to lower middle market firms. Further, middle market companies can also get some loans from Main Street Capital.
Under its management, this company sports a staggering $3.7-billion worth of capital. This beast’s portfolio consists of 200 companies. Average investing size? Around $10 million, how about that? Here’s a quick breakdown of Main Street Capital’s portfolio:
- 45% – lower middle market companies
- 32% – middle market
- 17% – private loan
- 6% – other investments
Is it safe to invest in this company’s dividend stocks? To help you decide, it went public in 2007, and since then it has paid consistent dividends. It has never cut its dividend—that’s another telling sign.
Omega Healthcare Investors Inc
This by far dominates all those mentioned above. Omega Healthcare’s dividend yield is a mind-bending 10.1%. It’s under the Real Estate sector in the Healthcare REIT industry. It’s easy to see that we’ve saved the best for last.
This company provides financing and capital to skilled nursing facilities and assisted living facilities in the US and the UK. Its portfolio consists of 1, 000 operating facilities across 40 states. Third parties operate these facilities.
Omega Healthcare’s operation scale and its diversification are just two of its key advantages. What’s more, it is the largest SNF-focused REIT in the US. As if that’s not enough, it purchased Aviv for $3.9 billion in 2015. Its revenues are regular and secure. Over 90% of its portfolio expirations will occur after 2021.
It’s easy to predict the trajectory of the secular demand for Omega’s operators. And that demand is fast-growing because of the equally fast growing senior population.
On the other hand, changes in government healthcare policies could pressure the company’s operators, or even the whole industry. In its latest earnings report, Omega slightly frightened investors. Check that report out, if you must.
Still, the present dividend condition of the company promises to remain stable. For more than 20 quarters, Omega has increased its dividend consecutively. It raised its payment every year since 2003.
It’s your call.
We believe we have kept our promise, now it’s your turn to decide. Spotting and hunting the best dividend stocks to invest in are not easy to do. Of course, you should also obtain other opinions about the companies we have mentioned. But as long as you know where to look, what to look for, and how to keep yourself safe, you’re quite secure.
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