A dividend stock is a publicly traded company that regularly shares profits with shareholders through dividends. These companies tend to be both consistently profitable and committed to paying dividends for the foreseeable future.
While it may be less exciting than chasing the latest stock market high-flyer, dividends can make up a significant portion of investors’ total returns over time.
How dividend stocks work
To collect dividends on a stock, you simply need to own shares in the company through a brokerage account or a retirement plan such as an IRA. When the dividends are paid, the money is automatically deposited into your account.
Companies may choose to pay dividends for a number of reasons, but most often it is a way to share the company’s profits with its owners or shareholders. Companies may also try to pay dividends if they do not have enough business opportunities to reinvest the money themselves.
Dividends are usually paid quarterly, but other schedules are also possible. Special dividends are one-time payments that should not be expected to occur again.
A company’s board of directors will approve its dividend policy and announce its plans to investors through a press release or a filing with the Securities and Exchange Commission.
Investors should be aware of some important dates:
- Announcement date: This is the day the company announces its dividend plans.
- Record date: Investors who are registered as shareholders from this day onwards will receive the dividend payment.
- Ex-dividend date: This is the day on which shareholders who purchase the stock will no longer receive the next dividend payment.
- Payment date: This is the day on which investors receive the dividend payment.
How to invest in dividend stocks
Oil titan John D. Rockefeller Sr. once said that seeing his dividends was the only thing that gave him pleasure. Do you want to discover for yourself what Rockefeller was talking about? You should buy shares in companies, mutual funds or ETFs that pay dividends.
Individual companies
One way to receive dividends is to buy shares in a company that pays them. Many companies pay dividends, and several have a long history of increasing payouts annually. For example, in February 2024, Walmart announced that it would increase its annual dividend for the 51st year in a row. But you’ll want to be confident in the company’s strength and sustainability before planning future dividends.
A company’s dividend yield can be calculated by taking the annual dividend per share and dividing it by the share price. This percentage, or yield, can be used to compare options among different companies, mutual funds, or ETFs and help you determine where you can get the most bang for your buck.
High yield mutual funds and ETFs
If you’re looking for a more diversified approach, funds and ETFs with high dividend yields can be an attractive option. These funds tend to hold companies with higher than average dividend yields and can be a way to generate higher income than a typical portfolio. The Vanguard High Dividend Yield ETF (VYM) has consistent dividend payers like JPMorgan Chase, Johnson & Johnson, and Home Depot and has annual fees of just 0.06 percent.
Dividend appreciation funds and ETFs
This approach typically includes companies that have a history of increasing dividend payments over time. While returns will likely be lower than those of funds that focus solely on high payouts, dividend growers may see more share price appreciation in the long term based on higher earnings growth rates. Funds that focus on dividend growth often include companies like Microsoft, Walmart, Visa or even Apple.
Dividends can make up a significant portion of investors’ total returns, which include both income and stock price appreciation. According to a 2023 study from Hartford Funds, reinvested dividends have accounted for 69 percent of the S&P 500 index’s total return since 1960.
Things to watch out for
Taxes: It’s important to remember that dividend income is taxed if the stock is held in taxable investment accounts. To avoid this, consider owning the shares through a tax-advantaged account such as a traditional or Roth IRA.
Dividends Can Be Cut: Dividends are not guaranteed and sometimes companies are forced to cut them or eliminate them altogether due to financial problems. That’s why you have to be careful if a company pays out a very high dividend. Sometimes that high yield really is too good to be true, and the high yield can be a signal that investors expect the company to reduce the payout.
But owning a diversified group of companies through an index fund can be a good way to avoid the risk of picking the wrong company. Over the past fifty years, the only meaningful decline in S&P 500 index dividends per share occurred during the financial crisis of 2008 and 2009, when many banks were forced to cut their payouts. Dividends fell by about 20 percent during that period, but have since easily surpassed the previous peak.
Rising interest rates: When interest rates rise, this can also pose a risk to funds and ETFs with high dividend yields. As interest rates rise, investors who bought dividend funds to boost their income may shift their high-yield stocks to bonds or other assets, causing stock prices to fall.
10 high-yield stocks in the Dow Jones Industrial Average
| TICKER SYMBOL | COMPANY | ANNUAL DIVIDEND* | DIVIDEND YIELD* |
|---|---|---|---|
| *Dividend and return amounts current as of March 28, 2024 | |||
| VZ | Verizon | $2.66 | 6.40% |
| MMM | 3M | $6.04 | 5.77% |
| DOW | Dow Inc | $2.80 | 4.82% |
| CVX | Chevron | $6.52 | 4.17% |
| IBM | International business machines | $6.64 | 3.48% |
| KO | Coca-Cola | $1.94 | 3.18% |
| AMGN | Amgen | $9 | 3.14% |
| CSCO | Cisco systems | $1.60 | 3.21% |
| J.N.J | Johnson & Johnson | $4.76 | 3.01% |
| GS | Goldman Sachs | $11 | 2.65% |
How are dividend stocks taxed?
The way dividend stocks are taxed depends on the type of account you hold them in. If you hold the shares or dividend-paying funds in an individual or joint account, you pay tax on the dividends you receive and on any dividends. realized profits. The amount of capital gain depends on how long you have held the asset and your income level.
If you hold dividend stocks or funds in tax-advantaged accounts, such as a traditional or Roth IRA, you won’t pay taxes on the dividends or your realized gains.
Investing strategies for dividend stocks
For those interested in dividend investing strategies, there are generally two approaches to consider:
- Dividend Yield: The first option is to buy stocks or funds that offer high current dividend yields. These companies may be undervalued or may be facing business challenges that have depressed their stock price and increased dividend yields. In some cases, the dividend could be reduced or even eliminated to address financial problems.
- Dividend Growth: Another option is to own companies or funds that have consistently increased their dividends over time. These stocks will typically yield lower returns than high-dividend stocks, but they usually have healthy underlying businesses with a history of rising profits.
What are the Dividend Aristocrats?
The Dividend Aristocrats refers to a group of S&P 500 companies that have increased dividends per share for at least 25 consecutive years. With the S&P 500 Dividend Aristocrats ETF (NOBL), investors can easily buy these companies that have consistently rewarded shareholders.
To be included in the Dividend Aristocrat group, companies must:
- Be a member of the S&P 500.
- Have increased annual total dividends per share for at least 25 consecutive years.
- Have a float-adjusted market capitalization of at least $3 billion.
- Have an average daily trading amount of at least $5 million.
The list of Dividend Aristocrats covers 68 companies (as of March 2024) and includes well-known brands such as Coca-Cola (KO), Walmart (WMT) and International Business Machines (IBM), as well as lesser-known companies such as Illinois Tool Works (ITW) and Expeditors International from Washington (EXPD).
Dividend stocks versus dividend funds
An important decision investors will have to make is whether to buy dividend stocks or dividend funds. A dividend stock is just a publicly traded company that pays dividends, while a dividend-focused mutual fund or ETF is a basket of many dividend-paying stocks.
The main benefit of the fund approach is that you spread your risk across a larger number of companies, rather than having to pick a handful of individual stocks yourself. This is the advantage of diversification.
On the other hand, if you are a more experienced investor and enjoy researching companies, you may be able to earn higher returns by concentrating your investments in just a few companies that you know and understand well. Some high dividend stocks may face a specific business challenge. A thorough investigation into that issue can help identify an attractive investment. But for most investors, dividend funds should be a safer approach.
In short
Dividends can have a big impact on your portfolio over time. They can help generate income during or earlier in retirement and can also be reinvested to increase your overall investment return. Consider owning dividend-paying companies through a low-cost fund or ETF in a tax-advantaged account as part of your long-term investment plan.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
