If you are a dividend investor and enjoy investing in socially responsible companies, the iShares ESG Aware MSCI USA ETF (ESGU) may already be on your radar. It is one of the largest equity funds that meet certain environmental, social and governance standards. It produces a modest dividend – but what if you could only invest in the highest-yielding ESG stocks?
Here are the highest-yielding dividend stocks from one of the largest ESG equity funds.
ESG stocks with the highest dividend
The highest-yielding stocks in the iShares fund may not immediately look like what you might think of as ESG stocks: some telecom companies, some energy companies and some financial institutions. Here are the top ten largest payouts from the fund.
| Company | Yield |
|---|---|
| AT&T (T) | 7.9% |
| Verizon (VZ) | 7.9% |
| Truist Financial (TFC) | 7.2% |
| Natural Resources Pioneer (PXD) | 6.9% |
| UGI Company (UGI) | 6.5% |
| Crown Castle (CCI) | 6.0% |
| 3M (MMM) | 6.0% |
| ONEOK (OKE) | 5.8% |
| Huntington Banc Shares (HBAN) | 5.6% |
| Prudential Financial (PRU) | 5.4% |
Source: Yahoo Finance, data as of August 21, 2023
While high yields are tempting, they may not be sustainable, and the high yield may be evidence that investors expect the company to cut the dividend in the near term. So some investors avoid the very highest stock returns and instead move to the next level down, expecting these stocks to offer more sustainable returns that may even grow over time.
Stocks with a long-term record of dividend growth remain a popular option among investors. Not only do they typically provide a safer yield, but they will also increase it over time. The best dividend growth stocks are called Dividend Aristocrats, and these stocks have a track record of growing their payouts annually for at least 25 years – making them quite popular!
What you need to know when investing in dividend stocks
If you are buying individual dividend stocks, you should analyze the company to see if the dividend is sustainable before buying the stock. If you want an easy way to buy a portfolio of dividend stocks without a lot of analysis, look for the best dividend ETFs.
Here are some important things to consider when looking at dividend stocks:
- Current Dividend Yield: Too high a yield could be a sign that the dividend is in danger of being cut. If the dividend is cut, this usually affects the share price. But if you buy a low yield, it may not grow fast enough when you need the income. By finding a balance between too high and too low a dividend, you can enjoy sustainable returns that can grow.
- Payout Ratio: The payout ratio is the company’s dividend divided by its earnings. The lower this figure, the more sustainable the dividend and the more the company can safely grow the payout. If the payout ratio regularly exceeds or even approaches 100 percent, you should expect the dividend to be cut.
- Business Stability: A stable business allows the company to increase its payout regularly and gives it the ability to maintain a higher payout ratio, all else being equal. For example, telecom companies are generally stable businesses, while energy companies are often plagued by boom-and-bust cycles that hurt their profitability.
- Dividend Growth Rate: The stock’s historical dividend growth can give you an idea of whether the dividend will grow in the future. A fast-growing dividend can quickly make up for a dividend that is slightly lower today, especially if that dividend is more sustainable.
Companies with a long track record of paying a growing stream of dividends are among the best choices for dividend investors. The Dividend Aristocrats list is a great place to start researching dividend stocks, and then you can refer to them to see if they also appear on ESG lists. This way you can meet your dividend and ESG criteria.
Finally, if you really want to build a dividend dynamo, reinvest your dividends in more shares of dividend-paying stocks. You can set up your brokerage account to invest your dividends in more stocks and increase your payouts over time. The best dividend reinvestment brokers let you buy fractional shares, putting your entire dividend to work.
In short
When investing in dividend-paying ESG stocks, you should carefully consider the company’s financial condition and competitive position. It’s much easier to invest in a dividend ETF or even a dividend-paying mutual fund, and you benefit from the safety of a diversified portfolio. And of course, if you want an ESG fund that pays dividends, you’ll need to look specifically for that type of fund.
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.
