A dividend is a reward that publicly traded companies pay to investors for sharing their capital. Companies use share profits to pay dividends regularly. Some investors choose holdings that pay dividends so they can have an income they can count on whenever they are paid. Obviously, the higher the dividend, the better it is for the investor, but what is considered a “high” dividend? This guide will explain more about the strategies some investors use to gain a source of income and how you can find the highest-paying dividends for your portfolio holdings.
What Are Dividends?
To expand a little more on the idea of dividends, let’s take a more in-depth look at what they are. Stocks that pay dividends are popular options for investors because they provide the unique asset of appreciation paired with a regular payout. Dividends use a compounding effect to grow a portfolio holding quickly.
Investors can choose to keep their dividend payouts invested with the company, which compounds how much they will grow their money. By having more money available to purchase more shares of a company, investors can earn larger and larger dividends.
Dividends are most often paid to investors every quarter. They may either take this payout in cash or leave it reinvested in the company. As mentioned above, reinvested dividends can earn serious amounts for investors. Most often, companies will award stockholders a certain dollar amount per share as a dividend. So, if you owned 1,000 shares of ACME company and paid $1 per share for a quarterly dividend, you would receive a dividend of $1,000.
The board of directors for the company will decide if, when, and how much to offer for dividends. And once a company commits to paying out dividends, they usually don’t go back.
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Types of Dividends
Here are the various types of dividends that companies may issue to stockholders to reward them and attract more investors. Keep in mind that as an investor, you must own a stock before the dividend date to take advantage of the next dividend payout.
Companies can reward investors by giving them additional stock in the company directly. Of course, investors can sell the extra stock they have, but often they will keep it to keep growing their portfolio. Companies often reward this type of dividend, so they don’t have to take from their cash balance. These additional shares will not be taxed until the investor is ready to sell them, meaning they may present lower taxes for them.
Preferred stockholders will be rewarded with preferred dividends that are often higher than dividends paid to common stockholders. Preferred shareholders have the advantage of being paid first, before the common stockholders. However, the dividend amount is usually fixed and not reliant on how many shares they hold.
Dividend Reinvestment Programs often referred to as DRIPs, give the investor the option of putting their dividend back into their company holdings, usually with the benefit of a discount. This discount often will waive commission fees or include discounted share prices.
Special dividends don’t occur quarterly or on any set basis. Instead, special dividends will often reward stockholders for profits that they have accrued over a few years. This is very rare and will not usually happen more than once in a company’s history.
The Benefits of Dividend Stocks
Choosing to buy shares of a company that pays dividends is a lucrative way to bolster your portfolio. Dividends can offer a stable stream of secondary income, a way to grow holdings in a company faster or a mixture of the two. Companies that pay dividends that increase yearly are even more attractive to investors to offset any cost of inflation.
Most often, dividends are paid by large companies that don’t have as much of a need for short-term cash to grow the business. Instead, they can make their stock more valuable by providing an attractive quarterly payout. New companies in industries like high-tech will often decide not to issue dividends because they need to reinvest the cash into growing the company and outpacing competitors.
For this reason, stocks that provide a dividend are perceived as more stable and more valuable to investors. Many of the largest companies in the U.S. offer dividends that increase every year. Companies like Apple, Disney, IBM, and Edison, all reward dividends to common stockholders.
One great way to invest in companies that provide dividends is to invest in an ETF that tracks these companies. Dividend ETFs will give the investor a taste of a variety of high-value companies while diversifying their holdings. The fund managers will collect dividend payouts from the companies and then spread them to the fund investors based on their holdings.
Ways to Measure Dividends
Investors will want to look at some of the terminology and differences between dividends to decide where they allocate their money. Here are some of the things you can keep in mind when choosing to buy shares.
The dividend yield is the annual dividend payout divided by the stock price at the time. Your trading platform of choice should have this information available while you are browsing different companies.
The dividend yield will help you decide which stock will offer you the most. For example, a $20 stock that offers $0.20 per share every quarter will be much higher at a 4% dividend yield than a $100 stock that only provides a $.01 per share dividend at a 1% yield.
When yields rise, stock prices will fall and vice versa. So investors need to look closely at companies offering dividends yields of 4% or higher. However, there are many safe stocks that were designed to pay a high reward.
Dividend Per Share
Dividend per share is the measure of how much of the overall dividend is allocated to each investor-held share. The dividend per share (DPS) can tell investors if there is still room for the dividend to increase.
Dividend Payout Ratio
The payout ratio is a key safety measure to check before investing with a company. The DPR measures the ratio of the companies net income that goes toward dividend payments. It should raise some red flags if a company spends all of its net income on dividend payouts. That is because if earnings fall in the future, the company may not be able to pay dividends at that time. A payout ratio of 80% or below will generally be a safe investment to ensure dividends are paid.
What Is Considered a “High” Dividend?
Investors should not only seek companies that pay the most in dividends but pay them consistently and sustainably. When it comes time to choose companies that pay high dividends consistently, there is no better place to look than The Dividend Aristocrats market index. Here are a few of the top paying companies when it comes to dividends:
- AT&T (T): This telecommunications giant pays out dividend yields currently around 6.9%. Investors can build value quickly with yields this large. Since AT&T is a mammoth company, they yield a safe percentage of their net income.
- Kinder Morgan (KMI): Kinder Morgan is an oil and gas company that has massive pipeline infrastructure across the United States. They currently have a dividend yield of 6.3%.
- Williams Cos. (WMB): Williams Cos. is an oil and natural gas pipeline company that pays out dividend yields at currently 6.95% for investors. They have an incredibly strong grasp on the industry that makes them a very safe bet for future performance.
- Altria Group (MO): Altria is a tobacco company that oversees brands like Juul, Marlboro, and Copenhagen. Regardless of your thoughts on tobacco, Altria provides an outstanding 7.22% dividend yield to investors.
- Lumen (LUMN): Lumen (formerly known as Century Link) pays some of the highest dividends of any S&P 500 company. They currently have a dividend yield of 7.77%. Industry experts estimate that telecom will keep growing, and there could be potential for this dividend to rise even higher in the next few years.
These companies are all part of the S&P 500 and all safe bets when it comes to covering dividends. However, still, keep dividend ETFs in mind so you can diversify safely.
Tips For Investing In Dividend Stocks
Dividend stocks may become one of the most worthwhile investments in your portfolio. Here are some of the things you should do to get started.
- Find a quality dividend-paying company – Large, well-established companies like AT&T are great investments for the long term. You will want a healthy dividend yield and all of the safety indicators we’ve already mentioned.
- Evaluate the company and the dividend offering – You should compare the yield with other high-dividend companies, check the dividend payout ratio and the dividend per share.
- Budget your allocation – You may decide that you want to liquify another asset in favor of one that pays a nice dividend. Check out expert analysis from online sources to check projections, and don’t forget to perform all normal due diligence when purchasing a stock, like the price-to-earnings ratio. Make sure the dividend yield is sustainable, and there are no other red flags or negative news headlines.
Benefits During Tax Season
If you are interested in some of the unique tax benefits that dividend investing can present, make sure you are looking at stocks that are “qualified” for you to hold for 60 or more days at a lower capital gains tax rate. However, if you want the dividend to be a secondary source of income, you will be paying the normal income tax rate.
Dividend Investing Tips For Success
When you are first looking for a dividend stock to invest in, you may be tempted to jump at the highest dividend yields. But it is often a much better idea to concern yourself with dividend growth. You want your dividend to have a great opportunity to grow as you add ever-increasing amounts of shares to your holding.
It is also best to stay with prominent names. Choosing from Fortune 500s (or Fortune 100s) will often be your best bet to securing a safe and reliable income. Companies in the Dividend Aristocrats are the companies that have increased their dividends for over 25 straight years. Companies always want to keep their streak going to keep their value up, so it’s a safe bet that they will do whatever it takes to keep increasing their dividend.
As a last tip, always focus on investing in companies that provide a massive amount of worth and revenue. Companies that produce products we can’t live without are the ones that always pay off in the long run. Choose companies that have recurring revenue, like Microsoft, Edison, and Exxon.
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Dividend stocks are an amazing way to supplement your income or build your asset holdings faster. When it comes to choosing a dividend stock, remember that high yields aren’t the only thing you should consider. Check for the indicators that will let you know the company will continue to pay out dividends for the foreseeable future and adopt a plan to either reinvest with a DRIP plan or enjoy your extra earnings.
A high dividend is upwards of 4%, with the highest dividend yield-paying companies like AT&T and Lumen paying at the high end of 6-7%. Dividend stocks are an amazing way to diversify your portfolio along with alternative investments. Good luck in your investing ventures!