Looking to invest in stocks that offer a steady income in the form of payouts as well as the potential for capital gains?
Dividend stocks are the place to look. In this lesson, you’ll learn what dividend stocks are, their key characteristics, and where you can go in order to buy them. We will also provide you with examples of some of the top dividend stocks available today.
What are dividend stocks?
Dividend stocks are stocks of companies that pay out a portion of their profits to investors. Those payouts take place at set intervals, with quarterly dividend payouts being the most common. This is not a hard-and-fast rule, however, and you will sometimes see companies pay out dividends monthly, biannually, or annually.
Why do investors look for dividend stocks?
Investors generally look for a mixture of capital growth and income when buying dividend stocks. Investing in a stock means tying up a portion of your money in one asset, which lowers the amount of liquid capital you have at your disposal. Stocks that pay out dividends provide you with income even as your money sits in those stocks.
Dividends stocks can be a particularly attractive option for retired or semi-retired people who don’t have big income streams coming in from work and thus use dividends to improve their cash flow. The best dividend stocks offer decent steady payouts while also offering solid potential for price appreciation and capital gains over time.
What are the defining characteristics of dividend stocks?
1) Dividend payouts
Dividend stocks pay out a percentage of earnings on a regular basis, most often every three months (at the end of each fiscal quarter). The size of those dividends can vary widely depending on the company in which you have bought stock. A metric known as the dividend yield is the dividend amount per share, divided by the price per share. This figure is expressed as a percentage and is the most common way of assessing different dividend stocks.
2) Uninterrupted dividend payouts
Dividend payments are never guaranteed, and companies can stop paying dividends in poor economic conditions. To ensure you get the regular payouts you want, check to see if the dividend stocks you want to buy has a track record of at least several years of uninterrupted payments.
3) Dividend growth
Consistent, uninterrupted dividend payouts are a nice feature to have. If the size of a stock’s dividend yield goes up over time, that’s even better. A feature of dividend stocks is that if they perform well, then not only do you benefit from increased capital gains, but the dividend payments will also rise.
4) Potential price appreciation
If all you wanted was a series of regular payouts, you could just as easily open a savings account. The point of buying a dividend stock instead is for the potential price appreciation that comes with owning a stock, in addition to the dividends. Some dividend stocks will pay out low dividend yields, while offering more potential for price appreciation; others will offer high yields, but lower potential for price appreciation. An ideal scenario is a combination of healthy yields and robust capital gains.
Here are some examples
If you’re looking to pick up a few dividend stocks to balance your portfolio with some stocks which generate a consistent income, here are a few companies to consider.
1) Chevron (CVX)
Chevron is one of the largest energy companies in the world, with operations in more than 180 countries. As of early June 2020, the stock has rebounded nearly 70% from its March 2020 lows, and it pays out a healthy 5.1% dividend yield.
2) IBM (IBM)
For decades, IBM has been one of the largest technology companies in the world. Once a leader in personal computer making, IBM has more recently jumped into emerging technology markets such as blockchain. IBM’s stock carries a 4.9% dividend yield.
3) Altria Group (MO)
Altria is one of the world’s largest producers of cigarettes and other tobacco-related products. The stock has struggled over the past few years in terms of price appreciation. But it’s gained ground more recently, climbing about 30% from its March 2020 lows to its early June 2020 level. Altria also offers a huge 8% dividend yield.
4) Whirlpool (WHR)
Whirlpool has seen even more dramatic recent price gains, more than doubling in price from late March to early June 2020. The home appliance maker carries a dividend yield of 3.5%.
How do I find dividend stocks?
Lots of investing websites offer screening tools that enable you to search for dividend stocks based on parameters such as dividend yield. You can also find the best dividend stocks right here, via our lists of top-performing dividend stocks that we publish monthly on this site.
Ok, now you’ve got to grips with dividend stocks, simply click to check out our next lesson, this time focussed on small-cap stocks.