Overview of Dividend Contenders
A dividend is a portion of a company's earnings that it pays out to shareholders. For example, Nike Inc. (NYSE: NKE) is a Dividend Contender. As of January 18, 2023, Nike pays out $1.36 per dividend share. Since the company issues its dividend quarterly, shareholders receive 34 cents per share every quarter (34 x 4 =136). An investor who owns 100 shares of Nike stock would receive $136 in dividends yearly.
Dividend Contenders have increased their dividend for 10 to 24 consecutive years. The only requirement for a company to be a Dividend Contender is dividend growth. For other distinctions, such as the Dividend Aristocrats, a company must meet additional requirements in addition to increasing its dividend.
One of the benefits of investing in Dividend Contenders is that once companies commit to not only paying but increasing dividends, they typically go to great lengths to keep such streaks intact. Stocks that pay dividends, particularly those of companies with a streak of raising dividends, catch the eye of income-oriented investors.
Many companies, such as Nike, are mature in their business cycle. They still have growth opportunities, but they generate significant earnings that exceed the amount they need to reinvest in their business.
Although earnings growth is bullish for a stock, shareholders don't like to see companies with too much excess cash on the sidelines. Companies use dividends to increase shareholder equity. Think of it as a bonus for owning the stock in a bull market and an incentive to keep holding it in a bear market.
Dividend Contenders vs. Dividend Champions
Dividend Contenders are in the middle of two other distinct groups of stocks:
- Dividend Challengers: Dividend Challengers are companies that have increased their dividends for five to nine consecutive years.
- Dividend Contenders: Dividend Contenders are companies that have increased their dividend for 10 to 24 consecutive years.
- Dividend Champions: Dividend Champions are companies that have increased their dividend for at least 25 consecutive years.
Once a company has become a Dividend Contender, it is no longer on the list of Dividend Challengers. Once a company is a Dividend Champion, they are no longer on the list of Dividend Contenders.
These are not the only categories of elite dividend stocks. MarketBeat is a good resource for you to find out more about how to invest in the Dividend Aristocrats or why you may want to invest in Dividend Achievers.
Example of a High-Quality Dividend Contender
An example of a Dividend Contender is The Southern Company (NYSE: SO). The company has a payout ratio of over 88%. That's exceptionally high, but consistent earnings support it. That means barring a disruption in the company's core rail business, it can support its dividend and can grow.
In general, stocks that pay dividends represent quality companies. With that said, Dividend Contenders already stand out because they have a history of paying and growing their dividends.
To earn a dividend, you have to be a shareholder of record on what is known as the record date. When the time comes to receive dividends, the cash automatically gets reinvested into your account (in the form of more shares or partial shares) or gets paid directly to you.
A company's board of directors must approve dividends and announce plans to investors. At the time of the dividend announcement, the company will announce a few key dates: the announcement date, the record date, the ex-dividend date, and the payment date. Let's take a quick look at the definitions of each:
- Announcement date: The announcement date is when the company announces its plans to release a dividend payment.
- Record date: As of the record date, shareholders will receive the dividend payment.
- Payment date: The payment date is the official day you, the investor, will receive a dividend payment.
Many investors ask about the ex-dividend date in investing. Ex-dividend means "without the dividend." When a stock sells ex-dividend, it trades without the dividend added to its stock price. A simple example can help explain this:
Company A's stock sells for $150 per share and announces a $5 annual dividend paid in quarterly installments. On the ex-dividend date (see below), at the opening of trading, Company A's stock will be marked down by $1.25 ($5/$4 = $1.25).
Any investor buying stock on the ex-dividend date will purchase it at the current price minus the dividend amount. However, you will only be able to receive the upcoming dividend if you were a shareholder of record before the ex-dividend date.
So how do you use all of this to find a high-quality dividend contender? Some investors might look for the highest dividend stocks. It may be tricky because what constitutes a high dividend can be misleading.
For example, some investors will look for stocks with the highest dividend yield. But this is problematic because a company can calculate its dividend yield by dividing its current annual dividend payout per share by its current stock price.
These are two variables that can change frequently. When one or both fall, it can significantly impact the yield. And if the reason for that drop is due to a fundamental problem with the company, an investor may find themselves in a yield trap which may cause them to have to sell the stock for a loss.
Therefore, a better way to find high-quality Dividend Contenders involves monitoring their dividend payout ratio. The dividend payout ratio tells you how much of a company's profits pay out in the form of a dividend. When you compare one company's dividend payout ratio to its current and projected earnings, you can see how sustainable the dividend payout is over time.
Where to Find Dividend Contenders
A simple internet search will provide you with a complete list of Dividend Contenders.
However, now that you know the criteria (i.e., 10 to 24 consecutive years of dividend growth), you can quickly determine if a stock is a Dividend Contender directly from MarketBeat.com. Going to the "dividend" tab for a company can show you whether or not it has increased its dividend and for the number of consecutive years.
Dividend Contenders Sector Breakdown
Dividend-paying stocks are defensive. That means the underlying companies are in businesses that are in demand no matter what is happening in the economy.
So it should be no surprise that the financial sector has the largest representation of Dividend Contenders, and it's not even close. As of December 2022, there were 111 financial services companies among the dividend contenders. The second most companies came from the Industrials sector and the third sector was utilities.
But virtually every sector is represented in some fashion. Apple, Inc. (NASDAQ: AAPL) is included as a Dividend Contender from the technology sector. Other sectors include consumer cyclical, basic materials, consumer discretionary, real estate, communication services and energy.
Market Capitalization of Dividend Contenders
As you might expect, the list of Dividend Contenders is heavily populated by large-cap companies (those companies with a market capitalization of over $10 billion). That's because these companies are most likely to be in a mature phase of their business cycles.
However, the list of dividend contenders also includes mid-cap and small-cap stocks, or those that have a market cap of less than $100 million.
Dividend Contenders Offer Opportunities
One of the criticisms of dividend stocks is that they can be too conservative and not provide the opportunity for capital growth. That is particularly true of Dividend Aristocrats and Dividend Kings that have increased their dividends for 25 and 50 consecutive years, respectively.
That makes Dividend Contenders an intriguing option for investors looking for growth and income. These companies are still reinvesting strongly in their businesses but prioritizing shareholder equity by issuing a dividend.
However, it's important to note that companies can fall off this list. For example, The Walt Disney Company (NYSE: DIS) fell off in 2020 when it had to suspend its dividend due to the impact of the COVID-19 pandemic. But overall, these stocks are considered quality stocks for investors looking to buy and hold.
Take a look at a few frequently asked questions about Dividend Contenders.
What are Dividend Contenders?
Dividend Contenders are a select group of companies that have increased their dividends between 10 and 24 consecutive years. These companies include stocks from all market caps and sectors.
How can I get $1,000 per month in dividends?
Some high-dividend REITs (real estate investment trusts) have dividend yields of over 10% and pay dividends monthly. You could get $1,000 per month in dividends with an investment of around $800,000.
How do you decide on the top dividend stocks?
To find the top dividend stocks, you should consider companies with a sustainable dividend payout ratio and a history of not only paying but also growing their dividend over time. These companies will frequently prioritize shareholder equity, making them among the top dividend stocks.
How often are dividends paid?
Most dividends pay out quarterly. But some companies pay dividends on a different schedule, including monthly, biannually and annually. Some companies, even those that pay quarterly dividends, will sometimes issue special dividends.