Dividend Stocks: An Overview
Dividend stocks are stocks of companies that pay out a portion of their earnings to a class of shareholders on a regular basis. Usually, these companies are well established, with stable earnings, and a long track record of distributing some of those earnings back to shareholders.
The distributions are known as dividends and may be paid out in the form of cash or as additional stock. Most dividends are paid out on a quarterly basis, but some are paid out monthly, annually, or even once in the form of a special dividend.
While dividend stocks are known for the regularity of their dividend payments, in difficult economic times those dividends may be cut to preserve cash.
One useful measure for investors to gauge the sustainability of a company’s dividend payments is the dividend payout ratio (DPR). The ratio is a measure of total dividends divided by net income. It tells investors how much of the company’s net income is being paid to shareholders in the form of dividends versus how much the company is retaining to invest in further growth.
If the ratio exceeds 100% or is negative (meaning net income is negative), the company may be borrowing to pay dividends. In these two cases, the dividends are at a relatively greater risk of being cut.
Dividend stocks, as measured by the S&P 500 Dividend Aristocrats Index, have outperformed the broader equity market. The index has provided a total return of 0.3% over the past year, above the Russell 1000’s total return of -8.2%.
Below, we look at the top five dividend stocks in the Russell 1000 by forward dividend yield, excluding companies with payout ratios that are either negative or in excess of 100%. Several of them outperformed the broader market in the past year.
These market performance numbers and all statistics below are as of Aug. 24, 2022.
- Dividend stocks are stocks of companies that pay shareholders a percentage of earnings regularly.
- Dividends are usually paid quarterly but can be paid semi-annually or annually.
- Dividend yield is the ratio, expressed as a percentage, that compares the annual dividend amount to the stock price.
- Dividend yield changes as a stock price rises and falls.
- While dividend yield is valuable to know, it’s important to research additional information about a company before investing in it.
- Forward Dividend Yield: 10.26%
- Payout Ratio: 84.07%
- Price: $37.05
- Market Cap: $4.6 billion
- 1-Year Total Return: -29.4%
OneMain Holdings Inc. is a consumer finance company that provides origination, underwriting, and servicing of personal loans, primarily to non-prime customers. It operates through the following segments: Consumer & Insurance and Other segments. OneMain’s most recent quarterly dividend of $0.95 per share was paid on Aug. 12 to shareholders as of Aug. 8, 2022.
- Forward Dividend Yield: 10.13%
- Payout Ratio: 49.83%
- Price: $9.87
- Market Cap: $4.6 billion
- 1-Year Total Return: 3.8%
Rithm Capital, formerly known as New Residential Investment Corp., is a public real estate investment trust (REIT) investing in the residential housing sector. The company’s portfolio includes mortgage-servicing-related assets, residential loans, non-agency securities, and similar investments. The company announced the change in its name and stock ticker in June 2022.
- Forward Dividend Yield: 9.17%
- Payout Ratio: 52.33%
- Price: $10.91
- Market Cap: $11.3 billion
- 1-Year Total Return: -2.7%
Lumen Technologies is a technology and communications company that provides services to consumers and businesses worldwide. It provides an integrated platform that brings together network assets, cloud connectivity, security solutions, and voice and collaboration tools to help businesses use their data and adopt next-generation technologies. On Aug. 22, the Federal Communications Commission (FCC) approved the sale of Lumen’s incumbent local exchange carrier (ILEC) business to internet service provider Brightspeed in 20 states. The value of the sale is roughly $7.5 billion.
- Forward Dividend Yield: 8.56%
- Payout Ratio: 45.20%
- Price: $72.45
- Market Cap: $47.4 billion
- 1-Year Total Return: 172.6%
Devon Energy is an oil and gas exploration, development, and production company. The company also transports oil, gas, and related products and processes natural gas.
- Forward Dividend Yield: 8.18%
- Payout Ratio: 75.59%
- Price: $23.47
- Market Cap: $7.3 billion
- 1-Year Total Return: -1.0%
Starwood Property Trust is a REIT focused on commercial mortgages. The company engages in real estate lending, investing, and servicing across both commercial and residential properties.
The markets often see higher than average dividend yielding stocks as riskier than high dividend growth stocks. Such yields can even imply weak growth prospects. Be sure to look at the financial health and growth potential of companies in addition to dividend yield before investing.
3 Ratios Used to Analyze Dividend Stocks
Dividend Yield: This ratio measures the annual value of dividends received relative to a security’s per share market value. Investors calculate the dividend yield by dividing the annual dividend per share by the current stock price.
For example, if company XZY issues a dividend of $10 annually with a current share price of $100, it has a dividend yield of 10% ($10 / $100 = 10%). Those seeking high-yielding stocks can start their search by screening for issues with a divided yield above a certain percentage. Bear in mind that there are many other factors besides dividend yield that investors should consider before investing in a stock.
Dividend Payout Ratio: The DPR measures how much of a company’s earnings are paid out to shareholders. Investors calculate the ratio by dividing total dividends by net income.
For instance, if company XZY reported a net income of $50,000 and paid $15,000 in annual dividends, it would have a DRP of 30% ($15,000 / $50,000 = 30%). This means the company pays out 30% of its earnings to shareholders. Generally, a company that pays out less than 50% of its net earnings in dividends is considered stable and has the potential for sustainable long-term earnings growth.
Dividend Coverage Ratio: This ratio measures the number of times a company can pay dividends to its shareholders. Investors calculate the dividend coverage ratio by dividing a company’s annual earnings per share (EPS) by its annual dividend per share.
For example, if company XZY reported $10 million in net income with an annual dividend of $2 million to shareholders, it has a dividend coverage ratio of 5 times. ($10 million / $2 million). Typically, investors view a higher dividend coverage ratio as more favorable.
Advantages of Dividend Stocks
Two key advantages of investing in dividend stocks include generating a passive income and dividend reinvestment.
Passive Income: Companies that pay dividends typically issue them quarterly, creating a reliable stream of passive income that investors can spend how they please. Dividends also have the added advantage of offsetting share price depreciation.
Dividend Reinvestment: Investors can reinvest dividends they receive back into the company to acquire more shares. This is called a dividend reinvestment plan (DRIP). Participating in a DRIP allows the investor to take advantage of compounding returns—a proven strategy to build long-term wealth.
Do Your Dividend Stock Research
A high yield is great but it’s just one of several aspects to consider when investing in dividend stocks. A higher than average yield can signal trouble if a struggling company is paying large dividend amounts in an effort to attract investors.
In addition to dividend yield, be sure to take a good look at the following data as well.
- Payout ratio: As mentioned previously, this is the percentage of earnings that a company pays to its shareholders. A payout ratio of 35% to 55% is considered healthy because a company that distributes up to half of its earnings as dividends is likely to be a good performer and an industry leader. Importantly, it’s reinvesting a good share of its earnings back into itself for growth.
- Dividend increases: A solid history of increasing dividends is welcome news because it indicates that a company has had the financial wherewithal and desire through good economic times and bad to keep paying its shareholders, and to raise the amount it pays.
- Dependable revenue and earnings growth: Over time, the more stable, the better. An occasional erratic result might not raise eyebrows but anything else may signal a company in trouble.
- Solid market share and competitive advantages: These can help companies maintain their ability to be excellent performers. Such advantages might be intellectual property, advanced technology, high barriers to entry, and a highly recognizable and respected brand name.
What Is the Dividend Yield?
It’s a percentage that represents the income (via dividends) that a company pays stock investors compared to the price of the stock. Dividend yield is just one metric that may help investors to decide whether or not a company’s stock can make a good addition to their portfolios.
How Does the Payout Ratio Relate to Dividend Yield?
While dividend yield compares dividend income to stock price, the payout ratio compares dividend income to company earnings. In other words, it shows investors how much a company pays them versus how much it keeps for itself. It can provide an idea of the income investors may expect to receive in the future. A payout ratio that is too high—where the company pays investors much more than it reinvests in itself—can mean there’s not much room for dividend growth. It may signal a company in trouble.
What Companies Have Paid Dividends The Longest?
Famously, the following companies are among those that have paid shareholders dividends for over 100 years: Coca-Cola, General Mills, Chubb, Colgate-Palmolive, Proctor & Gamble, Consolidated Edison, Eli Lilly, and Exxon Mobile.
The Bottom Line
Dividend yield compares the income a company pays shareholders to the price of that stock. It’s calculated by dividing the annual dividend amount (the amount of income paid throughout a year) by the stock’s price. While a high dividend yield may be appealing, it doesn’t necessarily mean a stock is a smart investment.
Dividend yield is one tool to use to screen for dividend stocks that are potentially worth owning. Overly high dividend yields may indicate that a company is struggling. Likewise, companies with extremely high payout ratios can also signal danger to investors.
Before investing your money, invest some time in looking for companies that are financially healthy enough to sustain and potentially grow their dividends, and continue to offer an attractive dividend yield.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.