Topic: Dividend Stocks

The Best Paying Dividend Stocks Have Steady if Not Rising Dividends

April 16, 2024|by Scott Clayton

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A history of sustainable dividends is one key characteristic of the best dividend paying stocks

Stick to the best paying dividend stocks and you’ll avoid most of the market’s greatest disasters.

As well, one of the best ways to pick a company that cares about its investors is to seek out ones that pay dividends. We like to take it a step further and look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and create press releases to appear to be making progress, but they cannot fake dividends. The longer they have been paying dividends the better the chances that they will increase their dividend payout.

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The best paying dividend stocks: What to look for before investing

The dividend yield is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

When you’re looking for income-producing stocks, focus on the best paying dividend stocks for your portfolio.

However, at the same time, the reliability of those dividends is important because a high dividend yield can also be misleading.

That’s why we place a high value on a sustained history of dividend payments.

An attractive yield, and especially a very high dividend yield, can give you a false sense of security. That’s because many investors have a tendency to think that dividend income is almost as safe and predictable as bank interest.

The fact is that investment income can dry up suddenly. Money-losing companies are sometimes unable to keep paying a longstanding dividend, and they sometimes spring the bad news on their shareholders with little or no warning.

Additionally, a high dividend yield may mean insiders are selling and pushing the price down. A falling share price makes a stock’s yield go up (because you still use the latest dividend payment as the numerator to calculate yield—but the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses.

The best paying dividend stocks are a sign of investment quality

Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

The best paying dividend stocks can be a big part of long-term investment gains

If you stick with top-quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains.

It bears repeating, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Good dividend stocks are a valuable component of any sound investment portfolio.

Bonus Tip: A dividend reinvestment plan for dividend investors

Some dividend stocks give their shareholders the opportunity to participate in their dividend reinvestment plans (DRIP). This lets investors use their dividends to buy new shares.

DRIPs bypass brokers, so you save on commissions. DRIPs also eliminate the nuisance effect of receiving small cash dividend payments. Generally, investors must first own and register at least one share before they can participate in a DRIP. Registration will generally cost $40 to $50 per company. The investor must then notify the company that they wish to participate in its DRIP.

You can register for dividend reinvestment plans at no cost through most discount brokers (these are called “synthetic DRIPs”). However, the broker may or may not pass along any reinvestment discount to you. As well, you can only buy whole shares through these DRIPs, so dividends paid must be greater than the share price. For example, say you receive a $35 dividend, and the stock is trading at $30. Assuming the company does not offer a reinvestment discount, you would receive one share and $5 in cash.

DRIPs help high-growth dividend stocks attract more investors. They also let them conserve funds by issuing shares instead of paying out cash, which all growth companies like to do.

What factors would make you concerned if a stock you hold suddenly increased its dividend significantly?

Do you reinvest your dividends or do you prefer to take the dividend payout?