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Top 5 Dividend Stocks That Investors Love

Dividend investing provides stability to your portfolio. You can choose some of the top dividend aristocrats to balance risks associated with growth stocks.

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

 

 

Did you know that dividends have been responsible for one-third of the returns offered by S&P500 since 1945? Also, leading investor Warren Buffett is known to favour stocks that have a history of paying dividends. More than half of his holdings comprise of dividend stocks.

What makes dividend stocks attractive is that they are considered a good hedge against inflation. When you buy a dividend stock you get dividend payments as well as a chance to benefit from any appreciation in the share price. You can also use the dividends to buy more stocks and enhance your portfolio. Investing experts like Benjamin Graham advocate buying dividend stocks since they help cushion price declines in other assets in your portfolio.

1. Things to Know Before Buying Dividend Stocks

  • To receive the dividend pay-out, you must be a shareholder on a specific date preannounced by the company’s board of directors. Stocks that are trading ex-dividend do not entitle you to receive the most current dividend pay-out.
  • The dividend should not be the sole criterion for choosing stocks that you wish to invest in. It’s important to consider other factors like share price trends and price to earnings (P/E) ratio.

Tip

For a well-diversified portfolio, seasoned investors include dividend stocks from different sectors and with different growth cycles.

2. High Dividend Yield Stocks

Many traders tend to choose stocks that offer a high dividend yield, which is represented by the annualised dividend as a percentage of the share price. This means that a higher yield can result from a decline in the share price, which may be indicative of financial troubles at the company. This is why experienced traders do not consider the dividend yield as the only factor for selecting a stock. Instead, they check the factors driving high dividend yield.

Did you know?

Utilities and consumer staples have stocks with the highest dividend yields.

Tips to Avoid Falling in the Dividend Yield Trap

  • Compare the dividend yield of a company with that of its peers. If it is significantly higher, it may be a sign of avoid investing and investigate further.
  • Check the pay-out ratio, which shows how much of a company’s net earnings are paid as dividends. This ratio will help you gauge the company’s ability to sustain the dividend payment in the future.
  • Check the company’s dividend history both in terms of yield and pay-out growth to get a better idea.
  • Stay abreast of the quarterly announcement of results. If the company exceeds expectations or raises its outlook, it means its financial health is improving. This gives more confidence in its ability to pay dividends.

3. Investing in Dividend Aristocrats

Dividend aristocrats are those companies that have consistently raised their dividends. As of 2022, there were 65 companies in the S&P500 index that had raised their annual dividend for at least 25 consecutive years and have a minimum market capitalisation of $3 billion. These companies have exhibited their ability to effectively manage their capital, besides earning healthy profits and adding to their cash flows over time. The consistent increase in dividend pay-outs is also an indication of the company’s ability to overcome the ups and downs in the economic and business cycles.

The list of dividend aristocrats has companies from the following sectors:

  • Materials
  • Consumer staples
  • Consumer discretionary
  • Healthcare
  • Financials
  • Industrials

Did You Know?

Since investors favour dividend stocks, the positive sentiment supports their share price. The dividend aristocrats have outperformed the overall S&P 500 index by more than 10% since 1999.

 

4. Top 5 Dividend Stocks

 

A. 3M (MMM)

3M is a leading manufacturer of industrial chemicals and adhesives, wound care products, bandages, and water filtration solutions. This dividend king has paid dividends for 100 years and raised pay-outs for 64 consecutive years. The company paid a quarterly dividend of $5.96 per share in 2022.

b. International Business Machines (IBM)

IBM is a tech giant whose shares have underperformed the overall market and the tech segment over the last five years. The company returned close to $6 billion to shareholders in dividends in the fourth quarter of 2022. IBM ended 2022 with a whopping $8.8 billion of cash on hand, versus $1.3 billion in yearend 2021. The company has raised dividends for 26 consecutive years.

C. Exxon Mobil (XOM)

This integrated energy giant is engaged in all aspects of fossil fuel energy generation, from exploration, production, and transportation to refining and retail gasoline sales. This diversification helps the company maintain its profitability in different economic environments. Exxon Mobil has had an impeccable track record of dividend payments since its inception. As of March 2023, the company had very little debt, a P/E ratio of 8.07 and dividend yield of 3.40%.

D. AT&T (T)

This telecom giant has raised its dividend each year for the last 36 consecutive years. The company spun off its stake in Warner Bros Discovery (WBD) in 2022 to pay down debt. AT&T ended 2022 with free cash flows of $16.17 billion. As of March 2023, the stock offered a dividend yield of 6.02%.

E. Boston Properties (BXP)

This real estate investment trust invests in premier workspaces. The stock lost around 20% in the first three months of 2023. As of March, the company had a P/E ratio of 9.90 and dividend yield of 7.34%.

Key Takeaways

  • Dividend stocks are considered good hedges against inflation.
  • The pay-out ratio shows how much of a company’s net earnings are paid as dividends and helps gauge the ability to sustain dividend payments.
  • High dividend yield can be a result of declining share price as well.
  • Dividend aristocrats and dividend kings have consistently paid dividends for several years.
  • Dividend aristocrats have raised dividends every year for at least 25 years.
  • Dividend kings have raised dividends every year for at least 50 years.

 

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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

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