Below you will find a list of the most popular dividend stocks among MarketBeat subscribers. These stocks pay dividend yields of 3% or greater and are sorted by the number of MarketBeat users following each company. The table below shows each public company's current dividend yield, payout ratio, market indicators and other important metrics investors use to evaluate dividend stocks.
Many investors know the importance of having a base of dividend stocks. These stocks provide investors with a regular source of income that they can either receive as supplemental income or that they can reinvest to increase their position in the stock.
The opportunity to reinvest dividends boosts the total return that investors have in a stock. Not only does this make dividend stocks a proven way for investors to build wealth. It also provides a form of inflation protection.
That being said, not all dividend stocks are the same. And while there are many quality options available to investors, there are also several dividends that only look good on the surface.
In this article, we’ll provide tips for how investors can evaluate dividend stocks so they can choose the best dividend stocks for their investing goals.
Understanding Common Terms
When you see a list of dividend stocks, you’ll frequently see some commonly used terms. If you’re new to dividend investing, here’s a brief explanation of what those terms mean.
Dividend Yield – This is a ratio that is the stock’s annual dividend divided by the current stock price. So a stock that pays out $4.00 annually and has a stock price of $100 has a dividend yield of 4%. However, stock prices move up and down on a daily basis. This means that the yield may change frequently making yield alone an imperfect measure for evaluating the quality of a dividend stock.
Annual Payout – This is the amount of a company’s earnings that they will pay out as a dividend. This is listed on a per share basis for the year. So if a company has an annual payout of $2.00 and pays a quarterly dividend, shareholders will receive 50 cents per share every quarter. So an investor who owns 100 shares would receive $50.
Payout Ratio – This tells investors how much of a company’s earnings goes towards the dividend. A higher number means that a company is applying more of its earnings towards its dividend. This is also an imperfect measurement because while a higher number is generally better, the more of a company’s earnings that go towards a dividend is less money that can go towards growth.
Evaluating Dividend Stocks
To properly evaluate a dividend stock, investors will want to take a look at the company’s financials to make sure it is financially sound. The reason for this is because investors would like the certainty that a company can maintain and perhaps even grow its dividend even if its overall financial conditions weaken.
The good news is that you don’t have to have a finance background to do the research you need to evaluate a dividend stock. Here are some quick things to look for.
Consistent Growth Above All Else
The most important characteristic of a quality dividend stock is that it is a growing company. Investors should look for consistent growth in both earnings per share (EPS) and revenue. This isn’t about expecting perfection. Even the best companies will have a bad quarter. Nor should you be a cockeyed optimist. Many financially weak companies will pull out an occasional good quarter.
What you want to see is a consistent pattern of earnings growth and revenue on both a quarterly (sequential) and a year-over-year (YOY) basis. However, you should also look for growth that is sustainable. Dividend stocks are different from growth stocks in that the companies are generally in mature industries. That means these stocks tend to have single-digit growth in revenue and earnings.
Cash is King
Along with growth in revenue and earnings, investors will want to see companies that have a health cash flow. Investors should look at a company’s free cash flow (FCF) as a good metric to determine the overall health of a company’s cash position.
Watch the Company’s Debt Levels
Just like in your personal finances, too much debt is bad for business. Or in this case, it can be bad for a company’s dividend. This is because when a company has too much debt, they will tend to allocate earnings towards paying off the debt and away from its dividend. For most companies, it’s easy to find a number called its debt-to-equity ratio. Ideally, investors should look for a ratio that’s below 2.00.
Compare Apples to Apples
The problem with ratios and percentages is that it can create a false comparison between two companies. For example, a real estate investment trust (REIT) is required to pay out up to 90% of its earnings as a dividend. As a result, these stocks have some of the highest dividend yields available. You’ll want to make sure you compare companies that are in similar sectors (financials, consumer durables, healthcare, etc.).
This brings me to another point. At any given time, one sector may be performing better than others. However, even with an underperforming sector investors may be able to find a quality dividend stock.
